The findings of the fifth annual Chase Business Leaders Outlook, a survey of over 1,600 midsized business leaders, show a growing optimism about the national economy. And for the first time in the history of the survey, middle-market companies’ optimism about the national economy exceeds their outlook for their local economies and industries.
But that confidence drops when looking outside of U.S. borders — at least in the near term. Foreign competition appears to be a significant challenge for middle-market businesses, rising to its highest level since 2012. Northeast and Midwest leaders, in particular, expressed concern regarding competition overseas, which may be tied to the rising value of the U.S. dollar and its impact on exports.
Similarly, manufacturers remain more preoccupied with foreign competition than other industry leaders, which again could be related to the dollar’s increasing strength and manufacturers’ concerns about the cost of commodities.
Smart Business spoke with Dave Schaich, president of the Western Pennsylvania Middle Market at Chase Commercial Banking, about the survey results and strategies for navigating a higher-dollar environment.
What expectations do middle-market business leaders have for 2015?
In general, business leaders have steady expectations for revenue and sales and slightly higher expectations for profits. The most bullish industry is retailers — 80 percent of retailers expect higher revenues in 2015 and 78 percent expect higher profits (up from 67 percent and 55 percent, respectively, in 2014). Of course, retailers also anticipate spending more than other industries, so it will be interesting to see how the year will shake out.
In terms of growth strategies, company leaders are planning to take a slightly more organic approach than they have in years past. Rather than expanding in target markets in the U.S. or across the globe, they plan to focus on attracting new customers, diversifying product and service offerings, and up-selling or cross-selling to their existing client base.
What’s the outlook for global business?
Although 27 percent of middle-market executives had an optimistic view of the global economy last year, that optimism has dropped to 19 percent in 2015. That said, leaders whose companies are doing business overseas or plan to in the near future tend to be more optimistic than their non-global peers.
When it comes to doing business internationally, business leaders cite currency risk as the area of greatest concern. This year, this concern has increased significantly — from 39 percent in 2014 to 50 percent. But given the strengthening dollar, this really isn’t surprising.
How should companies plan for currency risk?
It’s a brave new world. Businesses have to think about managing currency risk in ways they really haven’t had to deal with in the last several years.
Overall, 73 percent of leaders surveyed estimate that up to a quarter of their total sales will come from overseas this year. This is up 3 percent from 2014. And with this increased non-domestic exposure comes various challenges, not the least of which is foreign currency exposure.
For decades, academics have praised the benefits of hedging long-term economic foreign currency risk by issuing debt in the same currency. While this is still good in theory, today’s U.S. multinational companies may find that hedging on a much smaller scale adds unexpected exceptions to the rule.
There are two reasons for this. First, firms are generally reluctant to issue debt in a foreign currency when interest payments in that currency are higher than the U.S. Second, the accounting treatment of foreign currency debt is not always issuer-friendly.
In today’s global economic environment, the importance of managing the impact of foreign exchange rates on companies becomes increasingly important. Overall, while the costs of hedging (i.e., paying higher interest) are immediate, affecting all-important earnings per share targets, the benefits of hedging today come through reduced volatility that can only be gained using a long-term strategy.
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