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12-10-2022 20:11

Nordic companies react to a new world order

Corporate treasury and finance departments are facing a new reality characterised by geopolitical tension, sky-high inflation and rising interest rates. Find out how they are responding in Nordea’s latest annual Treasury Survey: Re-assessing risk.

In less than a year, the risk landscape for Nordic companies has changed dramatically. So too have firms’ top concerns and what they’re doing about them. That’s one of the main findings of Nordea’s new 2022 Treasury Survey: Re-assessing risk.

“We’re living in a new reality when it comes to risk,” says study co-author Johan Trocmé, Head of Nordea Thematic Research. “Companies are seeing this and changing their focus in response.”

Dating back to 2014, Nordea’s annual Treasury Survey takes the temperature of corporates on a range of issues, with a special theme each year. This year’s study drew responses from large sample of around 160 Nordic and international large corporates across a range of industries.

We’re living in a new reality when it comes to risk. Companies are seeing this and changing their focus in response.

Johan Trocmé, Head of Nordea Thematic Research

A new reality, a new view on risk

For years, companies have enjoyed an environment of ultra-low interest rates, quantitative easing from central banks, high asset prices and strong capital markets. The picture is dramatically different in 2022, after Russia’s invasion of Ukraine triggered a cascade of effects, including surging energy, commodity and food prices, high inflationary pressures and rising interest rates.

“The contrast between today and recent years couldn’t be much greater. With all these crucial variables changing direction, we wanted to take the pulse of the large corporates to find out where they stand,” says Trocmé.

The survey focused on five main areas:

  • Companies’ exposure to Russia, Belarus and Ukraine
  • Their key risk concerns in 2022 versus 2016
  • Changes to their supply chains
  • Their exposure to China
  • How they are managing their commodity, FX and interest rate risks in 2022 compared to 2016

Exposure to Russia fairly substantial

Almost half (43%) of the surveyed companies reported exposure to Russia, Belarus or Ukraine. While the extent of the exposure is not huge, it is meaningful, Trocmé notes, typically a small share of revenues. Payments and sanctions are the top reported challenges.

What are companies doing about it? The vast majority (94%) are freezing these operations or exiting, with only 6% continuing with business as usual.

Inflation jumps to No. 1 concern

One of the benefits of the survey’s long track record is being able to spot changes and trends over time. This year’s survey took a helicopter view of what corporates see as their key risks in 2022 and then compared that with results from 2016.

The top-reported risk management concerns for 2022 are:

  1. Inflation
  2. Commodity prices
  3. Interest rates
  4. Supply chains
  5. Geopolitics

Of these, inflation and commodity prices saw the biggest change since 2016, shooting to the top of the agenda.

Supply chains will de-globalise

Supply chains have come under increasing pressure in recent years, starting with former US president Donald Trump’s trade war with China, followed by bottlenecks during the COVID-19 pandemic and now sanctions against Russia. The survey asked companies to look back at how their supply chains have shifted in recent years and how they’re expected to morph in the future.

Despite these pressures, supply chains in recent years have clearly continued along the decades-long trend of becoming more global. Unit cost has been the top driver, with companies seeking to source goods more cheaply from far-away places.

However, looking ahead to 2025, there’s an “overwhelming bias” for supply chains to become more local, says Trocmé.

What will drive the shift? The study found a sea change in the key supply chain drivers for corporates, with sustainability coming out on top followed by disruption vulnerability, and unit cost trailing farther behind.

That turnaround surprised Trocmé: “I would not have guessed sustainability would come out as the top driver. It shows that sustainability will be critical, and corporates will be scrutinising the sustainability of their supply chains.”

ESG a top concern with China exposure

Half of the surveyed companies reported having exposure to China, most of it in manufacturing and sourcing. When it comes to key concerns related to China exposure, ESG, which covers environmental, human rights and governance issues, came out on top.

“That is super interesting,” says Trocmé. “You don’t see western institutional investors shying away from China, yet large corporates are reporting ESG as the biggest single risk.”

Chinese business/macroeconomic risk followed by political risk trailed close behind as top concerns.

“Don’t expect direct foreign investment in China to surge in the years ahead,” says Trocmé.

Companies are not hedging more… yet

When it comes to commodity risks, companies’ energy exposure is broad and significant. Slightly more companies are hedging their energy and raw material exposures compared to 2016.

The majority of companies (84%) say they are able to pass on much of the cost increases to customers.

When it comes to FX exposure, fewer companies hedge FX in 2022 compared to 2016. The ones that do focus on hedging operating cash flow, accounts receivable and debt. They are also hedging a lower share of their short-term flow and a bigger share of their long-term flow.

FX hedging appears to be on the rise, however, with companies reporting recent or planned changes for longer hedges as well as hedging a bigger share of flows and more currencies.

Despite rising interest rate risk, the majority of companies (62%) have less than half of their debt hedged at a fixed interest rate. It also appears that companies have less room for active interest rate hedge management compared to in 2016.

Based on the survey results, Trocmé urges corporate treasuries to consider:

  • Are your policies right for the brave new world?
  • Do you have a good financial setup for tomorrow’s less global footprint?
  • Are you protected against extreme outcomes in a more volatile world?

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Explore more publications from Nordea Thematics

Nordea Investment Banking’s Thematics team also produces research for large corporate and institutional customers via the report Nordea On Your Mind.

The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

The themes vary widely, and many are selected from suggestions by customers. Examples include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

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