CHICAGO / LONDON (Reuters) — International companies are taking steps to mitigate the effects of
the turmoil in emerging markets, including hedging foreign currency
exposure more aggressively, reducing some investment plans, cutting
costs, and raising prices frequently.
While executives are not hitting the panic button just yet, and many
say the risks they face are hardly unique, they are still
aggressively tackling costs and making sure that revenue keeps up
with inflationary pressures. And many warn that if China suffers a
credit crisis as some fear, then things could get a whole lot worse.
From Africa to Asia to Latin America, policymakers are scrambling to
prop up their currencies and prevent a sudden exodus of foreign
capital by jacking up interest rates and taking other steps — all
this just as many emerging economies were already starting to slow
sharply after a decade-long boom.
The sudden onslaught of market volatility in Turkey, Argentina,
South Africa and Brazil, along with worries about an abrupt slowdown
in China, means companies are now bracing for deeper reversals in
demand for their products in emerging economies. And this is
happening at a time when their U.S. dollar or euro revenues from
many of these countries are also taking a hit because of plunging
emerging market currencies.
Automakers Ford Motor Co. <F.N> and Fiat SpA <FIA.MI>, home
appliance manufacturer Whirlpool Corp <WHR.N> and liquor giant
Diageo <DGE.L> all cited weakness and a more sober outlook in
once-roaring emerging markets in earnings reports this week.
Still, for many executives, especially those with decades of
experience in the developing world, wild currency swings and
economic ups and downs are a fact of life that they must deftly
navigate.
"We have had quite a bit of currency changes, particularly in the
very weak emerging markets. But let's put it in context," Jeff
Fettig, Whirlpool's chairman and chief executive said. "We've been
in the Brazilian market for over 60 years and we've managed hyper
inflationary periods, busts, booms, and we've never had a
loss-making year in Brazil."
Fettig said the appliance maker was not overly concerned that the
downturn in emerging markets would significantly affect the company
financially, since the most troubled economies account for less than
3 percent of overall revenue. The company has taken steps in
countries where currency devaluations had occurred to recoup
dollar-based raw materials costs.
Economists at Bank of America Merrill Lynch described the turmoil of
the past week as "a perfect storm of idiosyncratic risks" within
emerging markets — citing credit risks in China, political crises in
Turkey, Ukraine and Thailand, and the currency devaluation in
Argentina.
While all these events have further dimmed an already bearish
outlook for many emerging economies, a full-fledged crisis does not
look likely.
"We do not view the current wobble as the start of an EM-wide
crisis," Alberto Ades, co-head of Global Economics Research at BofA
Merrill Lynch wrote in a note on Thursday.
TAKING NO CHANCES
Companies with operations in emerging economies are nonetheless
dusting off contingency plans, with strategies varying country by
country.
"We are taking a wait-and-see attitude in terms of decisive action,"
said the treasurer of a multi-billion dollar advertising company
that books about half its revenue outside the United States. The
executive, who asked for anonymity because the company has not yet
disclosed fourth-quarter results, said his traders are not actively
hedging now for currency volatility but could begin doing so at any
minute.
For others, like Swedish apparel retailer Hennes & Mauritz <HMb.ST>,
hedging is a permanent strategy in emerging markets.
"We always live with a bit of currency risk," said H&M Chief
Executive Officer Karl-Johan Persson. "We will keep the hedging
strategy that we have. We think it works well for us."
While it is impossible to predict exactly where and when economic or
market turmoil might arise, most companies constantly monitor the
political, economic and financial developments in the countries
where they operate.
"Everybody right now is focusing on India, South Africa and Turkey,
but the issues there are not new. They just haven't been on the
front page," said another corporate treasurer who asked not to be
identified.
Even the mightiest of global companies can run into trouble in
emerging markets. Wal-Mart Stores Inc <WMT.N>, the world's largest
retailer, has struggled in hard-to-crack markets like India, Brazil
and China. On Friday, it cut its outlook to account for the closure
of 50 underperforming stores in the Brazilian and Chinese markets.
While voicing concerns about the year ahead in developing economies,
executives from motorcycle manufacturer Harley-Davidson Inc <HOG.N>,
heavy equipment maker Caterpillar Inc <CAT.N> and Philips <PHG.AS>
all stressed their long-term commitment to those markets.
"Overall, we like emerging markets. What worries me are the currency
fluctuations and the unrest in some of the countries," said Frans
van Houten, chief executive of Philips, the Dutch healthcare,
lighting and consumer appliances company. "I'm cautiously optimistic
for the longer term economic development."
Diageo, the world's biggest distilled drinks company, has also seen
its sales growth slow in emerging markets in the last six months,
especially in China. But the company, which gets about 42 percent of
its sales in emerging markets, is betting big that the growing
middle class in developing nations will be a driver of growth for
years to come.
"You will have economic growth in the emerging markets, even when
there are shocks and ups and downs," Diageo CEO Ivan Menezes told
reporters on Thursday. He said the company is streamlining
operations and seeking to become more agile in some of the more
volatile markets.
The volatility is also an opportunity for deep-pocketed players
looking to up the ante in emerging markets.
"As far as emerging markets go in real estate, there are some
fantastic opportunities all of a sudden because of the flight of
capital out ... and the tighter money in those countries,"
Blackstone Group LP's <BX.N> President Tony James said on a
conference call with reporters.
"We're suddenly able to buy real estate properties in fast-growing
markets at less than physical replacement cost."
THE WILD CARD: CHINA
For some newcomers and smaller players, though, the challenge in
emerging markets may not be worth the headache.
British private equity group 3i <III.L> said on Thursday it had
scrapped plans to raise a new Brazilian fund and that it would not
make any new investments there because of changing macroeconomic
conditions.
"Brazil remains a really interesting market but conditions have
changed over the past 12 months, there is much greater market and
political uncertainty and that has also been reflected in currency
volatility," the firm's finance director, Julia Wilson, told
reporters on a conference call.
Like China, India and other high-profile emerging markets, Brazil
was one of the world's economic success stories of the past decade,
chalking up lofty growth rates while also lifting more than 30
million people out of poverty. But Brazil has slowed sharply since
2010 under President Dilma Rousseff, whose heavy-handed economic
policies have scared off some investors.
The real wild card for emerging markets seems to be China, where
signs of strains in the banking system have stirred concerns about
the sustainability of Chinese growth.
"China has now become the second-largest economy in the world with a
GDP that is more than half that of the U.S. and since 2008 has
functioned as the engine of global growth," said Robbert Van
Batenburg, director of market strategy at Newedge USA LLC in New
York.
"If this escalates into a credit crisis that causes Chinese economic
growth to come to an abrupt stop, it will impact almost every nook
and cranny of the global economy."
(Additional reporting by Jed Horowitz,
Ben Hirschler, Kylie MacLellan, Lewis Krauskopf, Emma Thomasson,
Gregory Roumeliotis and David Gaffen; writing by Todd Benson;
editing by Martin Howell and Grant McCool)
