The fragility of the UK Government combined with the early stages of Brexit negotiations present real challenges for the plight of the Pound in the year ahead. For UK-based technology businesses, especially those which operate in other foreign markets, trying times may well lie ahead.
Theresa May’s decision to hold the June snap election not only back-fired politically, it also resulted in more turmoil on the currency markets. Sterling initially fell by around two per cent against the US dollar although it did later recover to its pre-election level. The FTSE 100, which has recently performed better when Sterling declines in value, opened 1.3 per cent higher just after the unexpected election results were confirmed.
This was hardly the strong and stable outcome the Prime Minister envisaged before the election. With the Conservatives now seeking to stumble along as a minority government as the UK faces what is arguably its biggest challenge since World War 2, there are some major worries about how currency fluctuations could impact on technology and other key industry sectors.
More than a year on, the EU referendum result continues to cause market uncertainty for many businesses in the British technology sector. Along with the impact the leave vote has had on the Pound, which has sank by 20 per cent against other major currencies since the referendum result, it is still far from certain what long-term effect Brexit might have in terms of access to European talent and the Digital Single Market.
Going forward, there are also questions about venture capital, which is so vital for a thriving technology sector. According to data from London & Partners, the Mayor of London’s promotional company, around £6.7 billion ($9.5bn) was invested into UK tech firms in 2016, a higher figure than anywhere else in the EU. Part of this major upturn came about due to the fall in the value of Sterling as UK tech firms looked more attractive to deal-makers seeking merger and acquisition opportunities.
Since the EU referendum vote, a number of the world’s leading technology companies also have invested in the UK, including Google which ploughed £1bn into a new headquarters in London, and Facebook, which announced it was creating an additional 500 jobs in the capital via the British Business Bank.
However, with more economic uncertainty than ever, who knows what level of capital investment will be going into the sector in the year ahead. With this sentiment in mind, it’s perhaps unsurprising that Chancellor Philip Hammond’s Autumn Statement included plans for an extra £400m in venture capital funds. With Brexit talks now underway and Ms May claiming she will hang on as Prime Minister, at least for the time being, the Pound and the UK economy could be set for a rocky ride in the months ahead.
UK-based technology companies which operate in the EU must also consider the threats hanging over the Euro. Events in the year ahead could still prove significant in determining the longer term fate of the single currency.
Germany’s elections, to be held in September, will certainly be critical. While Angela Merkel is currently looking solid, there’s still time between now and September for unanticipated events to shape the outcome of these nation-wide elections. Should more radical parties like AfD gain further traction, it could significantly impact the stability of the single currency.
Potential for fluctuations in currency values can, of course, present a threat as well as an opportunity for technology companies if they are well-prepared to capitalise on market movements. Businesses with foreign currency requirements, especially those which trade across the UK and within EU nations, need to look at how they can best conduct their transfers strategically to manage their exposure and secure profitability.
Firstly it’s important for a business to clearly understand what their level of exposure is in terms of currency movement and then to set out an appropriate budget rate and create a suitable hedging plan. Using a combination of forward contracts, option contracts and spot deals in accordance with a set currency strategy can provide certainty and protection. Ultimately, protecting a bottom line and mitigating risk is paramount in these uncertain times.
Following June’s elections, the potential for further instability in the Pound has increased. With the UK facing at least two years (and likely more) of Brexit negotiations amid a now very challenging domestic political situation, the impact could be felt by both the British and EU economies.
These factors, combined with the unfolding saga of Donald Trump’s presidency and what this could mean for the value of the US Dollar, will make this a year of trepidation for the world economy. It is therefore vital for international businesses, including those in the UK technology sector, to ensure they are prepared for the journey ahead.