CHICAGO/LONDON Jan 31 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. and Fiat SpA, home
appliance manufacturer Whirlpool Corp and liquor giant
Diageo 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
"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
, 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, 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, heavy equipment maker Caterpillar
Inc and Philips 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 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 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
"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."