Today’s markets are filled with surprises. From the Dow Jones Industrial Average reaching record highs to the VIX hitting record lows, the markets are fueled by geopolitical uncertainty and globalization.
Brexit, the election of President Trump, and continued political turmoil and uncertainty related to the resulting policies (or in some cases the lack thereof) have changed the dynamics of the global economy. For growth companies, such factors also have increased the importance of managing their balance sheets. That’s especially true in the technology field, which has increasingly become geographically agnostic.
Of course, doing business globally means that foreign exchange is an important factor for finance. FX allows the past to be tracked using historical price movements, but today’s prices are forward looking in anticipation of the relative value of one currency against another.
Following the U.S. election in November 2016, many expected the U.S. dollar to rally for all of 2017. But the dollar remains one of the weaker currencies in today’s market and not necessarily a safe-haven currency. In fact, this year many currencies — and, hence, budget forecasts — have underperformed to date.
Since 2008, many emerging companies have only experienced stable or near-zero interest-rate regimes. However, that environment is beginning to change across the globe. Companies must begin to pay closer attention to their currency exposures and cash flows in order to protect their capital and maximize competitiveness. After all, when you’re looking to expand your global footprint, every penny counts.
Many of our clients at Silicon Valley Bank are tech startups, all across the spectrum of maturity from early-stage to late-stage firms. Although there are varying approaches to managing their FX exposure, it’s incredibly important for these companies that FX remains a major component of their financial strategies. Failure to hedge currency risk appropriately can be a big factor in the difference between success and struggle and could affect ultimate exit valuations or strategies.
Before implementing any FX strategies, it is important to gauge the condition of the market. Doing so can make all the difference when managing FX, as it can help distinguish the long-term outlook for currencies from the short-term factors in order to optimize FX trade execution strategies.
A company should ask: Is the market acting on fear or greed? What factors are impacting the movement of capital around the world? How is it moving — is it a mean-reverting market or a trending one?
To identify the market’s “mood,” we use a variety of filters on the Bloomberg Terminal, including heat maps, economic calendars, and news feeds that create a visual and customizable depiction of global markets. A forward-looking bias can help screen for inflection points in decision making.
In addition, social media platforms, like Twitter, can help to create a worldview by offering insights into markets across the globe.
It is also very important for a company to know itself well. Most often, young growth companies don’t have the luxury of excess cash, making the proactive management of FX even more critical. A great place to start is by evaluating the currency denomination of its own business, and those of suppliers, partners, and customers, to see when and where international exposure exists.
Taking a top-down perspective can also be quite helpful. A company will be much better positioned if it understands where its FX exposure lies within its overall risk portfolio. Being fully aware of cash flows and where dislocations could occur can, over time, lead to better decision making when executing an FX strategy.
Proactive management of exposures also indicates a level of sophistication that could be attractive upon exit. To that end, many tools, which are currently available although underutilized by most market participants, automate the tracking of currency movements and potential cash-flow effects. An open market-event calendar, a scrolling news panel, and percentage changes displayed by month, quarter, and year can help avoid surprises.
While timing is important for making any investment decision, all too often we have seen companies attempt to “play” the FX market. When managing FX exposures and engaging in risk mitigation, trying to be clever is often a mistake. FX markets can be noisy, and focusing on exact timing can distract companies from the dual mandates of capital preservation and maximizing cash flows for further investment.
On the other hand, complacency in managing FX can be just as costly. Board and audit-committee approvals may be slow and reactive. Paying close to attention to your exposures, combined with early communication to company governance of the risk areas, can often increase the company’s probability of success and its valuation.
The key is to balance short-term and long-term outcomes in decision making. Proactive and regular market evaluations with advanced tools and strategies can potentially unlock commercial opportunity layered onto risk mitigation. Sometimes that even translates to a little extra sleep each night for business owners, officers, and investors.
Technology is the very industry that has made our world more global, which has required tech companies to take a global view when managing their balance sheets. As the world becomes more integrated, currencies remain differentiators that will impact a company’s bottom line and probability of success.
Chappy Chapman is head of FX trading for Silicon Valley Bank.