Reduce FX Risks and Earn Higher Yields Amid Macroeconomic Uncertainty

WITH rising interest rates, persistent inflation and market volatility, companies are facing an increasingly uncertain business environment today.

But as the proverbial saying goes, every cloud has a silver lining. While borrowing costs have surged, higher interest rates offer businesses the opportunity to generate more returns on their investments.

Singapore-based motor group Wearnes-StarChase found itself in the position to do so with its excess pool of funds. Wearnes is a distributor and dealer of premium and luxury cars in South-east Asia.

Not content to let this pool of funds sit idle, the group sought to achieve a higher yield on its short-term as well as strategic cash. Plus, inflation would erode the value of its cash over time.

“Sweating your assets is very critical,” said Katherine Tan, chief financial officer (CFO) of Wearnes Automotive, a unit of Wearnes-StarChase.

“On the operations side, you need to turn your inventory (over more quickly), so your costs of funds are reduced. Correspondingly, if you’re holding cash, your requirement for yield also increases when rates go up.”

Global macroeconomic uncertainty has led to increasing volatility in foreign exchange (FX) rates.

Currency fluctuations remain a challenge for Wearnes, given the regional scale of its operations as it seeks to tie up with more international brand partners. The group operates in nine markets, including China, Thailand, Indonesia and Mongolia, and juggles about 12 different currencies.

“There’s a lot of complexity in dealing with other local business environments, including currency risks,” said Andre Roy, chief executive officer of Wearnes Automotive.

A robust FX management strategy can therefore go a long way in helping companies to maximise profitability, maintain stable operations, and engage in more strategic decision-making.

Findings from HSBC’s Rethinking Treasury Survey in 2021 revealed that corporate profits continue to be impacted by a failure to properly manage FX risks.

Of the 630 CFOs and senior treasury professionals from multinational corporations polled by the bank, 57 per cent said they suffered lower earnings in 2019 and 2020 due to significant unhedged FX risks. Only 23 per cent of CFOs viewed their treasuries as being superior on this front.

Some 29 per cent of respondents cited minimising impacts on consolidated earnings as their top objective, while another 29 per cent prioritised minimising FX impacts on booked exposures.

In 2022, HSBC approached Wearnes to learn more about its business needs and risk tolerance, so it could identify appropriate yield-enhancement solutions for the group.

In a nutshell, yield-enhancement solutions help corporate clients deploy their otherwise idle funds, while achieving potentially higher yields to meet their desired returns. (* see amendment note below)

“Our business is very cash-intensive because of the costs of cars, especially in the luxury segments we operate in,” said Roy. “So having reliable partners that understand our business is important.”

Wearnes had specific considerations in mind. First, it was seeking yield-enhancement solutions with an investment horizon longer than one year.

Second, it was looking for solutions that were principal-protected. “That itself to a bank is a challenge, because if you want high yield, it has to have an element of risk,” said Tan.

Considering that Wearnes was dealing with multiple currencies across markets, HSBC offered dual-currency FX solutions to help the group achieve its yield ambition on its excess funds. (* see amendment note below)

As a result, Wearnes was able to manage its FX risks from its currency exposures to the US dollar, Singapore dollar and Chinese renminbi. It also took up HSBC’s FX-linked structured investments as a second solution to mitigate currency-conversion risks.

On top of that, the group was introduced to HSBC Evolve, the bank’s customisable FX platform, which provides access to a wide range of currency pairs and transparency on pricing. (* see amendment note below)

This has in turn contributed to improved liquidity access and FX-conversion capabilities for Wearnes. In addition, it no longer has to go through the hassle of executing FX contracts and requesting currency rates over the phone.

“There wasn’t a holistic approach (back then),” Tan recalled. “We’d have to call a few banks, get the best quotes – it was all very traditional.”

As a value-added service, HSBC sends Wearnes daily FX market updates, including key data-release highlights and key movements in its portfolio.

This has enabled the group to stay abreast of developments in the currency market, as well as keep a pulse on its investments.

“Agility and flexibility are two traits anyone should have operating in today’s climate, which is extremely volatile,” said Tan. “You never know what is coming tomorrow.”

For corporates engaged in international trade and business, unhedged FX risks can lead to lower earnings and suboptimal financial performance.

Risk management is therefore crucial for companies in the region to prevent their growth from being curtailed.

“Asean economies are set to grow well above the global average in 2023, and Asean’s global foreign direct investment share has almost doubled in the last four years,” noted Joanna Lee, managing director and head of corporate sales, markets and securities services, at HSBC Singapore.

“Multinational and Singapore corporates looking to tap into this growth opportunity are increasingly looking for banking partners that not only have an extensive Asian footprint, but also a global network (that provides) East-West connectivity.”

As the leading international bank in Asia, HSBC is “uniquely positioned” to provide its corporate clients with access to global markets, she said. The bank offers a suite of risk-management tools and investment solutions to enable clients “to effectively manage their businesses and participate in this growth story”.

Its arsenal includes dual-currency FX solutions, FX-linked structured investments, as well as gold-linked investments and equity-linked fixed coupon notes. These solutions are designed to help companies achieve better yields, compared with leaving funds in fixed deposits and current accounts.

They can also be paired with dual-currency investments that combine two financial instruments – FX options and deposits – to deliver interest rates higher than those of conventional deposits.

However, it is important to note that there is no one-size-fits-all approach.

These solutions are ultimately contextual, said Lee, and must be aligned to the specific goals and needs of each business. In fact, inaction and hastiness are two extremes that result in businesses being unable to effectively generate yields from their funds.

That is why HSBC engages in regular conversations with its corporate clients to understand their risk appetites, preferences and requirements, she explained, before tailoring yield-enhancement strategies for them.

Most of the bank’s clients that have picked up these solutions are accredited investors with net assets of more than S$10 million. Not only do they have an established risk-management policy and risk appetite for such solutions, they are well-informed of the technicalities and hazards involved.

Lee added that HSBC has a rigorous and comprehensive process to determine the suitability of a derivative product for a client. Before any trade is proposed and carried out, it conducts significant due diligence, and adheres to a strict and detailed executive procedure.

It is also one of the few banks in Singapore offering explicit pricing transparency disclosures to protect the interests of commercial banking clients.