As Emerging Market Volatility Returns, Managing it Demands Big Data Analytics

The earlier piece referenced FiREapps’ research findings over the first quarter of 2014. Our most recent findings, for Q3, show that emerging markets (EMs) currency volatility was briefly dormant mid-year but is back with a vengeance. This resurgence and the resulting impact to corporate earnings illustrate two points. Firstly, EMs are by their nature more volatile than developed markets, so currency volatility flare-ups like this should be expected. Secondly, a corporate’s exposure to EM currencies presents a highly complex risk management challenge. Multicurrency accounting data is true big data. Managing it requires a big data analytics approach.

Emerging Market Volatility is Back

In Q3 of 2014, corporates reported that volatility in the Russian ruble (RUB) and the Brazilian real (BRL), in particular, impacted earnings. The RUB fell 14.3% against the US dollar (USD). The BRL strengthened over the first half of 2014, but since its peak at the end of June it has declined 12.3% against the USD – 6.6% in Q3 alone. US based motorcycle manufacturer Harley-Davidson, Inc. dealt with not only with the BRL but also the devaluation of many of their other currencies from the G10 group of economies as well. In their Q314 earnings call, Harley-Davidson’s senior vice president (SVP) and chief financial officer (CFO) reported:

“Foreign currency exchange was US$11.5m unfavourable for the quarter. This was driven by significant weakening of our key currencies within the third quarter. The euro, yen, Brazilian real and Australian dollar devalued an average of approximately 7% from the beginning to the end of the quarter. This resulted in an unfavourable revaluation of foreign-denominated assets on the balance sheet.”

To put the negative currency impact into context: US$11.5m of unfavourable impact is material, as it represented roughly 7.5% of Harley-Davidson’s net income of US$150.1m for Q314.

Even companies that took a less material impact in this quarter from RUB and other EM currencies are seeing major damage on the year as a whole. For instance, see the following excerpt from French small appliances producer Société d’Emboutissage de Bourgogne (SEB) SA’s Q314 earnings call. Vincent Léonard, SEB’s CFO and senior executive VP replies to an analyst question regarding forex and its impact as follows:

“We’re still looking at about €80m of ruble impact from currencies. It’s a different age in euros, if you will, because currencies have indeed moved quite a bit since July. They moved in a way that helped a little bit in Q3, but will penalise Q4. Q4 will be penalised by the strengthening of the US dollar, right; the strengthening of the yuan, the collapse these last four weeks of the ruble… and the renewed weakness of the real. So, we’ve seen a lot of moments through the summer. It helped Q3; take the real, it was a little stronger during the summer and then it weakened back again. The ruble also did a little better during the summer and then recently weakened significantly again. So, the dynamics are, obviously a little complex in that forex impact…”

In an Increasingly Complex Environment, Multicurrency Accounting Data is True Big Data

A corporate’s exposure to EM currencies presents a complex risk management challenge. The EM currency environment is not like the euro (EUR) crisis or the Japanese yen (JPY) devaluation. In those cases, companies saw very large and material losses as the dollar strengthened against the EUR and JPY. The losses were so significant because, for most US companies, the two currencies represent their largest single foreign currency exposures.

The EM currency environment is far more complex and in many ways more difficult to manage, because companies are exposed to a basket of EM currencies – many of which are interrelated, all of which are volatile. In that environment, volatility can come seemingly out of nowhere, and taking action to manage against one currency can affect the company’s exposure against other currencies.

In this environment, multicurrency accounting data is true big data. Big data is famously characterized by 3Vs: volume, variety, and velocity. Multicurrency accounting data sets are massive (volume); the data comes from disparate sources (variety); and it demands real-time analysis (velocity).

So Currency Risk Management Demands a Big Data Analytics Approach

Getting clear visibility into multicurrency accounting big data – that is, getting a handle on EM and other currency exposures despite the complexity – requires a big data analytics solution. The solution is one that pulls the data into one place, breaks it out of the hierarchies and serves up the data for analysis. The analysis ensures the accuracy and completeness of the data.

The stakes are high. Analysts, investors and other constituents have seen companies miss earnings targets because of a single inaccurate multicurrency transaction. When currency swings are compounded by a multicurrency accounting error – for example, posting a transaction late, recording the transaction incorrectly, or not relieving the transaction properly – that one transaction out of thousands can hit earnings per share (EPS) such that the company actually misses its targets.

With the accurate, complete, and timely view of currency exposures that big data analytics provides – again across the entire portfolio of currency pairs – companies have the visibility and tools to resolve issues like the improperly relieved transaction. Then, they can strategically assess their currency management options. With a complete picture of EPS at risk there are a variety of currency management tools at the treasury team’s disposal. Treasury may decide to manage risk synthetically with hedges, or they may realise opportunities for organic exposure reduction, or both.

Whatever decision is made, big data analytics gives the treasury team members the insight they need to analyse, communicate and likely manage currency risk. They are able to understand the ripple effects of actions they take to manage one currency pair on the company’s other exposures. They are able to be currency agnostic – to proactively manage currency risk, no matter how currencies move.


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