[TOP STORY] Corporates’ hedging policies must focus on protection


SIMON BROWN: I’m chatting now with Marc Steinhobel, head of structured FX at Investec. Marc, I appreciate the early morning. In a recent note you put out, US dollar strength, massive strength, at 20-year highs, has come down a bit in the last few weeks, but that’s sort of bringing volatility into the equation. You make the point that this can really hurt corporates, and yet many corporates’ currency and their hedging policies are fairly rudimentary and they should, frankly, be upping their game because this is an important component of many businesses.

MARC STEINHOBEL: Hi, Simon. Yes, definitely. I think that in a market where it trends in one direction you can have a rudimentary approach, and you’ll most likely outperform or protect whatever you’re trying to achieve. But because the market is so volatile and moves so dramatically, and we’ve actually had such a prolonged period of dollar strength, as an importer or a company that needs to purchase dollars you obviously hurt when the currency blows out. So moving from R14.50/dollar to R18.50/dollar, that’s where you really feel the heat.

But if you had a rudimentary approach in just locking in the forward exchange contract, which gives you certainty and gives you a finite rate, you would’ve done pretty well, actually, looking at this recent trend, I would say, over the last six months with the currency continuously blowing up. So you would’ve protected yourself at lower levels than we are currently seeing.

However, we do know the rand has been reverting. If you looked at it during Covid we saw, in March 2020, R19.40/dollar. But then it actually reverted all the way down to R13.50/dollar by July, 2021. And now we’ve seen this blow-up now to R18.50/dollar, R18.60/dollar. But let’s not forget that in April we were trading at R14.50/dollar. So it’s really to incorporate one or two or three hedging instruments, giving the expectation of the rand coming back. Do you have instruments in your arsenal to protect yourself from further blow-ups, but then obviously benefit from a pull-back?

SIMON BROWN: Do corporates have these skill sets, or is it really a case of they absolutely don’t and they phone someone such as yourself for that conversation? I’m thinking I’m a widget maker, and I’m the best widget maker in all of the world, but man, FX is not in my wheelhouse.

MARC STEINHOBEL: No, a hundred percent, Simon. I think [as] the banking community it’s our responsibility to incorporate and educate our clients in terms of what is out there. It’s not very different from forward exchange contracts or leaving things at spot, but it’s definitely a conversation to be had with a professional. In a sense, what you should be doing is putting hedging instruments together so that you can strip out emotion and just execute essentially on what your plan was. What I’m really talking about here is developing hedging mandates which strip out emotion because, let’s face it, when you want the market to increase and it’s increasing, you think it’s going to increase forever and you don’t pull the trigger, and vice versa.

So you really just want a hedging approach where you strip out emotion. You can be sort of mechanical in terms of entering the market, and what you’re trying to do is protect yourself. You’re not trying to beat the market, you’re just trying to protect value, whether it be your cost base or extracting the most revenue possible. That should be your mindset, not necessarily to beat the market.

SIMON BROWN: That’s a great point. You’re not doing this because you’re trying to make a profit or anything like that, you’re just trying to protect your business, protect your cost, whatever, protect your revenue if you’re an exporter. This is not about almost creating an income stream; this is about safety.

MARC STEINHOBEL: Exactly that. So protect yourself. And then, depending on the view and what sort of market intel you’re getting, you want to position yourself. It’s similar to investing for your personal [account]. You don’t just put everything in one asset class, you diversify yourself. It’s the same thing. What are you trying to achieve? You’re trying to achieve a return at the end of the day.

So you might be trying to achieve a budget. You might be trying to achieve a target. It’s very similar, to look at it in that perspective.

SIMON BROWN: Actually I quite like that. We’ll leave it there. Marc Steinhobel, head of structured FX at Investec, I appreciate the early morning.

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