May 10, 2016 / 11:04 PM / 3 years ago

Most UK-listed firms hedging against Brexit-driven hit for pound - survey

LONDON (Reuters) - Four-fifths of Britain’s major companies have hedged against the risk that a vote to leave the European Union would knock more than 10 percent off the value of sterling, a poll of almost 800 of the top 1,000 showed on Wednesday.

A two Euro coin is pictured next to a one Pound coin on top of a portrait of Britain's Queen Elizabeth in this file photo illustration shot March 16, 2016. REUTERS/Phil Noble/Illustration/Files

The anonymous poll by banking researchers East&Partners shows how big businesses have prepared for what is a major global risk. But wary of meddling in politics ahead of the June 23 vote, many have kept quiet about it.

Wednesday’s survey, based on conversations with chief financial officers and other senior employees at 777 firms, showed 90 percent believed leaving the EU would harm their business.

Some 93 percent said they had put hiring on hold because of the uncertainty, and 83 percent had halted investments.

“It’s clear from our research that financial managers at the UK’s leading companies are fearful of an EU exit,” East&Partners Head of Client Services Simon Kleine said.

“They are also very focused on managing the uncertainty the referendum is creating, particularly in relation to FX risk.”

The run-up to the vote has seen the pound fall around 10 percent against the dollar to its lowest since the aftermath of the 2008 financial crisis, but major banks have warned it could go far further after a Brexit vote.

The cost of hedging — making investments that offset the risk posed by currency movements — through options or other derivatives contracts, has surged as companies, asset managers and speculative hedge funds take a view on the vote.

The survey showed listed firms on average expected a 12 percent fall in sterling and had hedged 83 percent of their currency exposure.

“Generally large corporates would look at a hedge ratio of 50-75 percent so 80 percent is definitely right up at the top of what you would normally see,” said Tobias Davis, who sells hedging strategies to smaller UK listed firms for Western Union in London.

“The comparison here is with last year’s general election and the Scottish independence referendum. This time the material uncertainty involved is clearly higher.”

‘WATCHING THE RATE ALL THE TIME’

By contrast, the survey showed 83 percent of small and medium-sized firms thought sterling would not fall in the event of Brexit, and only 22 percent of the 1,012 asked said they had hedged their currency exposure.

That chimes with the view of more than a dozen small companies Reuters contacted in the past month whose business carries a substantial element of currency risk.

Many are resigned to exchange rate volatility but hope they can swallow any weakening of the pound.

“We always assume a level on sterling that gives us some margin for error,” says Marcin Dolnar-Zapolski, who pays Polish suppliers in zlotys for 70 percent of the groceries he sells in his south London delicatessen.

“Obviously the stronger the pound is, the better for us. So far we are still OK but it is getting close and we are watching the rate all the time.”

A related question is how Europe’s big asset managers and financial firms will react should polls shift more towards Brexit in the final month of campaigning, as they did in the Scottish referendum in 2014.

Europe’s biggest insurer, Allianz, said on Wednesday it was pursuing asset-liability matching for its business in Britain and had no open positions against sterling.

“We keep our obligations and our investments almost entirely currency-matched, so we therefore have made sure that we have no open positions against the pound,” Chief Financial Officer Dieter Wemmer told a conference call.

Additional reporting by Martinne Geller in London and Jonathan Gould in Frankfurt; editing by John Stonestreet

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