The Modern Rules Of Trade Wars: Uncertainty And Volatility

2018 has been a volatile year for many asset classes. While some securities and indices touched new all-time highs, others like Emerging Market (EM) currencies witnessed a sharp fall, battered by political events and the resulting uncertainty. Markets essentially have two broad phases in EMs – the good times when money flows into high risk and high return asset classes and the risk-averse phase when money moves out and back into safe-haven assets like gold, US securities and so on. The current volatile political climate has triggered a shift in market sentiment and the result is more risk and uncertainty.

What can companies do to protect themselves from such uncertainty?

The answer depends a lot on the nature of the business, the level of exposure to certain markets and whether the company is resilient, agile and financially sound.

Stormy waters – navigating international trade

The most obvious first casualties are companies that rely heavily on trade or any sort of foreign financial interactions, including investments. More volatility in the exchange rates means that the cost of hedging goes up, and if a company has foreign loans or trade obligations, not balanced by matching inflows, it can greatly impact exchange rate-related risks.

However, this is just the tip of the iceberg. Markets and companies can accommodate and adapt to adverse news, what really causes the damage is uncertainty. Political events like actual armed conflicts, sanctions or trade wars are by their very nature uncertain and it’s hard to predict the consequences in advance.

So how can companies cope?

Consumers bear cost

Those companies who are able to will likely pass on the additional costs to their consumers. Most companies have global supply chains, and this may work for companies that provide staple and necessary products and services, however, businesses that provide discretionary products may see their trade suffer.

Suppliers footing the bill  

Another possibility is that suppliers absorb the costs themselves. Suppliers that are part of the global supply chain might not be able to get back in once they are removed from the supply chain. So many often end up absorbing such risks themselves.  However, this obviously depends on their individual capabilities.

Adapt or die

In the longer term, companies usually adapt. They might drop certain suppliers, discontinue products or even exit entire markets if they don’t deem them profitable anymore.

The bottom line

It is possible for agile companies with strong balance sheets to survive uncertainty. Turmoil in markets or adverse downturns is catered for by business contingency planning. The real killer in these situations comes from uncertainty. Political uncertainty can throw the best-laid plans out of the door – it’s hard to plan if you can’t predict the regulatory stance or industry policy of incoming future administrations.

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Finance Managers: How to End Increased Protectionism, Small European Businesses Taking on the World, Third-Party Risk Management – The New Elephant in the Room.