Navigating Market Volatility

Strategic Responses to Potential Tariffs

As discussions around potential tariffs on Canadian, Mexican, and Chinese imports continue under the incoming Trump administration, businesses across America are considering how these measures might reshape trade dynamics and introduce volatility into global markets.

Understanding the Scope and Impact

Kyriba Director of Value Engineering, NORAM, Dory Malouf highlights the scope of these potential tariffs. Unlike previous trade actions, these measures would apply to all North American trading partners simultaneously and are linked to broader security concerns such as immigration and drug trafficking.

“The deep integration of North American supply chains, exemplified by Canada's 60% share of US crude oil imports, suggests more complex implementation challenges than previous tariff rounds,” Malouf explains.

If implemented, industries such as aerospace and pharmaceuticals could face disruptions, with historical data indicating that a 1% tariff increase could result in a 1.5% decline in exports. This underscores the potential for significant disruptions across other various sectors.

Volatility: A Likely Scenario

On Bloomberg Surveillance Monday, Melissa Di Donato, CEO of Kyriba, underscored the volatility that these potential policies could introduce into the global market. “A world of economic tariffs with Trump...brings to us that very big V word, ‘volatility’ in global markets,” she noted. With threats of tariffs reaching 100% on BRICS countries, businesses face increasing uncertainty about currency strength and market stability. This volatility could not only affect financial markets but also increase the lack of trust and predictability in global trade.

Major corporations, especially the “Mag 7” (Apple, Microsoft, Amazon, Google, etc.), are better positioned to weather potential volatility due to their robust margins and earnings resilience. “They could absorb currency fluctuation costs more effectively, maintaining competitive pricing during the point of volatility,” Di Donato points out. However, companies heavily reliant on imports, such as John Deere and Coca-Cola, may have to pass increased costs onto consumers, leading to higher prices for goods, a reality that could strain consumer budgets and alter market dynamics.

Role of the Treasurer: Strategic Financial Management

In this potentially challenging landscape, the role of the treasury is crucial. The strong U.S. dollar, coupled with potential volatility, presents significant challenges for corporations. A comprehensive approach to managing currency exposure would be essential, involving scenario planning, automation, and analytics. Andy Gage and Jeff Goggins emphasize the critical need for robust currency risk management frameworks. “Currency risk can impact a company in a number of different ways,” Gage explains. “It can affect revenues, balance sheet valuations, and ultimately net income.” This underscores the importance of employing hedging strategies and conducting scenario planning to prepare for various tariff outcomes.

Treasurers can also work with supply chain teams to diversify sourcing and reduce dependency on tariff-affected regions. Goggins says that, “If there were tariffs…a big impact to companies that are hedging or thinking about hedging is if they had to shift around their global supply chain, that would really disrupt the forecasts of what they even would want to hedge.”

Their discussion reminds us of the lessons from the previous Trump administration, where currency volatility was at its peak. “During the last Trump administration, we saw the largest amount of spiky volatility in the market for nearly 30 years,” Gage recalls. Companies must prepare for similar scenarios, ensuring that their risk management strategies are robust and adaptable.

Potential Surge in M&A Activity Amidst Tariff Increases

The current environment is marked by notable corporate liquidity, with American enterprises at $3.5 trillion out of combined revenues of $16 trillion, reflecting a 20% liquidity-to-revenue ratio, the highest since pre-COVID 2021. Despite this liquidity, the number of mergers and acquisitions (M&A) deals remains significantly lower, with a 41% drop in deal volume in the first half of 2024 compared to previous years, indicating a ‘wait and see’ stance among corporations.

However, 2025 holds potential for transformation in M&A activity, particularly as tariffs could cause significant shifts in corporate strategies. Di Donato predicts an increase in M&A, suggesting that “when liquidity rises, deals follow,” which presents both opportunities and challenges in this unpredictable environment.

Rising costs of imports might lead companies to acquire domestic suppliers, ensuring stable supply chains and reducing foreign reliance. Additionally, tariffs making exports more expensive could prompt firms to acquire local businesses, bypassing tariffs and expanding market presence. In this cost-inflated environment, achievement operation efficiencies through M&A becomes crucial, enabling companies to eliminate redundancies and maintain competitive pricing.

To mitigate tariff risks, companies might diversify their product lines or geographic reach through M&A, reducing dependency on vulnerable markets. Tariffs can depress stock valuations of import-reliant companies, making them attractive acquisition targets, presenting opportunities for strategic acquisitions at favorable terms. Investor pressure might also push companies toward M&A as a strategic response to economic shifts.

Overall, increased tariffs create a dynamic business environment where companies must adapt quickly, and M&A can be a strategic tool for navigating these changes.

The Role of Working Capital Management

In today’s volatile economic environment, managing cash flow and maintaining liquidity are critical for businesses navigating potential tariff impacts. Utilizing financial tools like factoring and supply chain financing can enhance liquidity, accelerate cash conversion, and stabilize vendor relationships, all while keeping cost of capital low. These strategies are essential for countering the increased cost of capital that tariffs might impose.

Moreover, effective liquidity management is vital to handle disruptions in supply chains and cash flows, enabling companies to swiftly adapt to fluctuations in interest rates and foreign exchange (FX) without compromising margins. Implementing currency hedging strategies can further protect working capital from adverse FX movements, a necessity for businesses with international exposure.

Scenario planning and stress testing help companies prepare for various economic outcomes, allowing them to develop proactive working capital strategies. This, combined with cross-functional collaboration among finance, procurement, and operations, ensures a cohesive approach to managing uncertainties.

Overall, prioritizing working capital management through these methods fortifies financial stability and operational efficiency, empowering businesses to confidently navigate the complexities of a tariff-impacted economy.

Preparing for the Future

As businesses prepare for these potential changes, strategic foresight is essential. From engaging in scenario planning to enhancing risk management capabilities, companies must be proactive in safeguarding their financial stability.

The new Trump administration's tariff policies could introduce a wave of uncertainty that demands careful navigation. By drawing on historical insights and adopting comprehensive risk management strategies, businesses can position themselves to thrive amidst the potential volatility and uncertainty that lie ahead.