Moving targets: company guidance
On June 23, the UK electorate delivered its closely contested verdict to leave the European Union, in what will surely go down as one of the most historic and monumental events the country has ever experienced. Whether this irrecoverable decision to exit will lead to a golden age of opportunity for Britain – now freed from the shackles of ever closer political and economic union – or rather a retreat into isolationism that will have damaging ramifications for generations to come, remains ultimately to be seen. However, what is indisputable is that this uncertainty is leading to extreme market volatility which is likely to continue for some time yet as the world adjusts to the new reality.
With market confidence rattled by the UK’s large step into the unknown, how should companies be steering investors’ expectations? Clearly, there are now a lot of variables that are outside companies’ control and it would take a brave company to stick its neck out and give long term guidance (foolhardy some might even say). What is vital is for companies to focus on those drivers that they have control and/or influence over when communicating with the markets – it is these companies that have clear and well-articulated investment stories, promoting key strengths, internal initiatives and other competitive advantages that will stand out from the rest.
Nowhere has this volatility been better exhibited than in the weakness of sterling. In the three days since the close of the markets on polling day, when one pound could buy you 1.48 greenbacks, sterling has now dropped by 10% to stand at 1.33. Clearly this has played havoc with analysts’ estimates for those companies with material non-sterling exposures. Potential issues thrown up might include: at what exchange rate should FX exposures be translated? What are the implications for future forecasts? How long might current sterling weakness last? Have some but not all analysts updated their forecasts with the prevailing rate? etc. etc..
However, currency volatility is one unknown that companies can address by reporting in constant exchange rates; not only does this help to avoid any potentially short-lived currency distortions but also focuses the market’s attention on the companies’ fundamental operations.
It is important to stress that companies should not avoid referring to currencies altogether; by all means they should be mentioned when talking about, for example: a) a change in strategy whereupon a company might plan to leverage currency weakness by going on an export sales drive; or b) how a company that imports a lot of its costs intends to manage that exposure.
In these tumultuous and uncertain times, it is critical not to hide but to be seen and heard.
Brexit, currency translation, exchange rates, FX, guidance, investor relations, IR, sterling, UK, UK referendum