In today’s marketplace it seems that political activities are the driving force behind market volatility more than ever. The United States, China, BREXIT, and other political developments have been dominating the headlines lately. Markets used to be based almost solely on economic fundamentals, and for that reason, be a lot more transparent and comprehensible. Something has certainly shifted in the last couple years. Today, the increasing role that geopolitics is playing in market movements presents challenges for executives and business owners in their planning.

Given this new reality, business leaders should work towards establishing a clear idea of the factors that could affect their business, and work with strategic partners who will help them stay ahead of those factors.

Hedging strategies for the unforecastable

Seeking certainty in an unpredictable world, business leaders should attempt to pivot their mindset to look at the benefits of a hedging program. “In a world of increased uncertainty, sound hedging strategies become super important. I would say that philosophically, what businesses would do well to consider is not look at the opportunity costs for hedging but the opportunity benefit,” says Mark Johnson, ATB’s Director of Interest Rate Sales.

“There is certainty in putting on a hedge. Companies will know exactly what their cash flows would be. In uncertain times, the possibility of negatively impacting events, is not dissimilar to the possibility of positive impacting ones. The risk profile to the business is largely symmetrical. In such a scenario, creating certain cashflows not only provides solace but represents prudent risk management,” explains Johnson.

Minimizing your risk amidst global tension

“When you’re in such an uncertain environment, you need to, within reason, look at the risks you have on your books - whether that be currency, commodity or interest rate - and at least look at structures and solutions to minimize your volatility due to market movement. And then you can focus on your underlying business,” shares Rob Laird, Managing Director of ATB’s Financial Markets Group.

“Our risk management experts take the time to understand the businesses we work with, their risk appetite, and their hedging goals before discussing specific solutions. For instance, if you are a manufacturing exporter, then we’ll assess the markets, and develop customized strategies to help manage your exposure to FX (foreign exchange) risk, so you can continue manufacturing your product and selling it across the border with stable margins knowing our solutions remain fully aligned with your business objectives.”

“At the end of the day, we view ourselves as your business partners with common objectives: helping you achieve cash flow certainty so you can focus on what you do best, which is growing your business.” adds Laird.

How geopolitics impact Alberta

Johnson says geopolitical trade uncertainty for Canada includes the “new NAFTA” (CUSMA) trilateral agreement with the United States and Mexico along with the China/US trade conflict (which has more of an indirect influence on Canada through the impact on global confidence in trade and supply chain and pricing disruption).

“The two impacts are quite different but equally profound,” says Johnson. “The good news is that the North American trade deal is effectively history. It’s done. It’s in the books. This is probably more impactful in other provinces - the auto industry for example. It’s also incredibly important to the dairy industry.”

“For Alberta, it is impactful in the tech industry, which hopefully will become a positive as we move forward and that industry continues to grow in the province. For Alberta’s economy, and its businesses, the most meaningful positive impact comes from any overall improved investor sentiment that exists with the approval of the North American trade deal.”

Meanwhile, the US/China trade conflict - which has impacted Albertan farmers and oil and gas producers as trade patterns have been disrupted and global aggregate demand has decreased - has shown some signs of reconciliation from the two sides with global sentiment improving too.

“What we really don’t know at this point is whether that positive sentiment is going to hold,” explains Johnson. “The myriad issues that the US has with China and the European Union - and that Canada has with China at some level - are not likely to go away anytime soon. Whether or not it just highlights those divisions and if investment is going to continue to be held back, we don’t really know. If it is, that’s obviously negative for everyone, including Alberta.”

“I think if we see a positive environment from an investor perspective, along with some positive movement on pipelines, that could be big for Alberta in a pretty major way. We’ve had significant under-investment in our industries in Alberta now for close to four years. The possibility of improved global sentiment. Low rates and more energy industry capacity could create a surprisingly virtuous cycle for Albertan business,” suggests Corey Hilling, Associate Director of Commodities and Foreign Exchange with ATB.

The impact on business

The impacts come downstream in three ways. One would be equity markets and a re-escalation of concerns around political risks, particularly the US/China dispute. A renewed concern surrounding that relationship is bad for equities and a challenging marketplace for publicly-traded companies’ efforts to raise capital. It will also hold back capital spending plans for many companies, solidifying balance sheets to some extent, but subduing economic activity and limiting future performance.

A second impact would be the Canadian dollar which is considered a high beta currency - meaning it’s value is derived in large part from other primary factors. The loonie is still very much connected to oil, but it’s also a currency tied to overall investor sentiment , particularly equities and the outlook for global growth.

In an environment where risk is seen as low, equity markets and the Canadian dollar will generally perform well . But in an environment where risks to the global growth outlook are heightened, and fear and uncertainty are tangible, equity markets will likely struggle which would also be a negative for the Canadian dollar.

“In terms of budgeting, for those companies that have cross border financial flows, the state of equities will be something to consider, whether they be exporters or importers. They will be impacted in opposing directions. So that will be something to bear in mind,” says Hilling.

The third factor to keep an eye on is global interest rates. If central banks believe economic risks are going to increase and geopolitical concerns escalate, that would be something they would be concerned about and it’s why we’ve seen significant easing of rates across the globe in 2019 as an insurance against geopolitical risks. “Central banks have created a very business friendly rate environment to act as security blanket in uncertain times,” Johnson said.

“If we get an escalation in tensions again, there’s going to be pressure put to bear on central banks to ease conditions further by as much as they possibly can. And if we get a reduction in tensions, we’ll see pressure from the markets on the central banks to consider raising rates - pressure I think they would probably resist for some time. But that doesn’t stop the markets from pushing bond rates up which pushes borrowing costs up for a client base- regardless of central bank patience in the short run,” says Johnson.