In the second edition of our Global Trade Barometer, Brexit takes centre stage. We shine a light on international trading trends of UK SMEs over the second quarter of 2016 from April until the end of June, including the days that followed the vote on June 23rd
In the aftermath of the UKs momentous decision to leave the European Union, sterling has fallen to 30-year lows against the US dollar as ‘poundemonium' hits the UK currency. The moves were fast and unexpected and spurred many UK SMEs into a knee-jerk reaction to protect their businesses from extreme volatility in currency markets. The single highest concentration of hedging trades in 2016 took place on Friday 24th June, the day the vote result emerged.
However, the reaction of SMEs to lock-in rates and hedge their currency exposures in the immediate aftermath of the referendum result contrasts sharply with their behaviour in the preceding three months. SMEs' use of hedging products - chiefly forward contracts and currency options - declined throughout Q2, falling 54% in the week before the referendum compared to their activity at the start of February, just before David Cameron announced the date of the EU referendum.
World First's latest Global Trade Barometer also reveals the impact of currency volatility on UK SMEs' investment decisions with one in four (24%) stating it had negatively impacted decisions to support development and growth in Q2 - a 9 percentage point increase on Q1 (15%).
In addition, 46% said that they were worried about on-going currency volatility and the impact it could have on their business, a 15 percentage point increase from Q1 (31%). 77% also think sterling will be volatile in Q3 - a 22 percentage point increase compared to their views last quarter.
The euro remained UK SMEs' currency of choice this quarter, however the proportion of currency trades denominated in euros fell sharply, from 49% to just 34% in Q2 as the USD came back into favour. Despite the immediate uncertainty, UK SMEs continue to trade internationally and explore new export markets with Norway and Canada seeing 25% and 20% increases in payments quarter on quarter respectively.
According to World First Chief Economist Jeremy Cook, we should expect volatility to continue: "Friday 24th June will go down in history as the one of the worst days in sterling's history, following huge fluctuations as Brexiteers eventually won the day. It may also prove to be a pivotal day for the UK's importers and exporters, with the latter rubbing their hands with glee whilst many of the former would have been left with their head in their hands. Now more than ever, businesses need a currency strategy to help them mitigate the risks to their business of future volatility, as we believe that volatility, uncertainty and fear is here to stay."
A significant portion (46%) of SMEs disagreed with the statement that the outcome of the EU referendum vote had been positive for their business' future prospects, whilst only 29% agreed (a further 25% said that they still didn't know).
Perhaps having been negatively impacted by a movement in rates, there has been a 7 percentage point increase (Q1 7% v Q2 14%) in the number of SMEs saying that they are not confident in their business' ability to manage currency risks.
Cook concludes; "It is easy to get swept up in all the apparent doom and gloom as the UK wrestles with its political and economic future, but this is an opportunity for some businesses to flourish. Exporters have seen their price competitiveness improve in light of the recent fall of the pound and a cheaper sterling could allow for an investment boost."
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