Monday, February 2, 2009

After Taylor Wimpey's £200m foreign exchange blow-up who will be next?

Are the big UK construction names such as Balfour Beatty, Taylor Wimpey and Atkins putting their future profit levels at risk by failing to pay enough attention to risks of foreign exchange-rate exposure?
Many larger UK groups have expanded over the past 10 years by followed the globalization route. But when the value of sterling drops, what then?
The Financial Times has picked Taylor Wimpey (TW) as an example, pointing to the foreign exchange blow-up that has cost it £200m while adding that TW is “far from the only victim”.
Globalisation has been the way to grow with the list of those heading in that direction also including the likes of Laing O’Rourke, Keller and WSP.

After Taylor Wimpeys £200m foreign exchange blow-up who will be next?

But questions are being asked – in fact alarm bells are starting to ring in some cases – as to whether UK-based companies have been too naïve when it comes to putting their house in order with regards to their foreign exchange exposure.
David Stevenson, in his FT column over the weekend, points out that most large companies pick from one of three options:

employ a sophisticated foreign-exchange treasury team to control risk (expensive and still risky) employ an investment bank to set up a straightforward hedge just trust the “good old corporate treasurer to work it out’

The latter is seen in the article as being the “road to ruin”.
The hedge fund manager talking to Stevenson asks: “What qualifies the finance director or the corporate treasurer to be an expert on such a liquid and varied market as foreign exchange?”
The FT’s verdict was: ” Most treasurers persisted in making the wrong decisions based on their judgment of where, say, the dollar/sterling rate was heading.”
But if this is the wrong position to take then what would be the right course of action?
Unfortunately there is little by way of an answer to this one as the hedge fund manager quoted – himself a foreign exchange specialist – had no idea where the dollar/sterling exchange rate is heading.
All of which suggests a picture (at best) of the blind leading the blind.
Globalisation has been a strong act to follow in recent times and as a result no less than 60% of all the profits made by UK-quoted companies today are earned overseas.
But if the handling of foreign exchange exposure is being done badly, we now have a possibility of seeing construction work on projects around the world still generating a decent profit, but only for that sum to then shrivel away as a result of the consequences of a falling pound.
UK construction firms who have established a firm foothold in America will have been left distinctly uncomfortable with the contribution to the article from Jeremy Batstone, head of research at Charles Stanley, who goes on record as saying:

“As like as not, prevailing economic policy measures will ensure that the dollar becomes the first major global currency of the modern era to collapse.”
Not what you want to hear on a Monday morning, perhaps.
“At which point, all those lovely US dollar-based assets will be in trouble and dividend payout will fall,” he adds.
“If that collapse were to happen this year, we could all be in for a nasty surprise.”

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