Martin Hingley's Blog

It is vitally important to avoid being short-sighted about currency when analysing world markets. We sometimes get into trouble in our market because ICT is very international one and yet its analysis is dominated by American researchers. Of course it’s not true only of the computer industry (or Americans) – listen to the BBC, talk to British academics, or listen to governments and you’ll soon realise that thoughts of the economy here don’t stretch much beyond our island shores.
‘A dollar is a dollar’, ‘a pound is a pound’ is an argument I’ve heard many times and it’s true of course. The trouble comes when you’ve got to handle financial results from multiple countries in multiple currencies. You end up having to choose a token currency in which to represent the total and think about exchange rates. The results can be fascinating. Let me give an example.
If you take the reported revenues of a handful of ICT vendors (say HP, IBM, Dell, Apple, Sun, EMC, EDS) over the last few years you get a picture like this:

… and it gives annual growth rates by region (adding separate quarterly results to the annual total and messing about a bit with companies not reporting by calendar quarters…) like this:

… However if you convert each quarter’s revenues into a different currency (say the Euro) you get a different picture. The shapes are very different by region, although the comparative positions remain the same at the end of period.

How do you handle the differences of exchange rate and region? In my opinion it’s best to convert each regional result into a token currency (say – the Euro for EMEA and the Chinese Yuan for Asia Pacific) and produce a combined picture as follows:

… Now you begin to get a feeling for the regional growth in regional currency, which I believe is closer to the market growth. Of course vendors talk about this in their financial announcements, referring to ‘Local Currency’ growth in addition to growth in their home currency (in my example they are all American companies reporting in $US)
You can (and should) go further if you are able to access local results in each quarter – calculating these current market values back to the chosen currency to create a constant (in this case $US) currency vision. You should always aim to hold financial data in local currency for each period (quarter) if you can and must be able to quote the specific rate for the chosen currency in each quarter (OANDA’s historical exchange rates are a good source).
Now I’m not the first one to mention exchange rates and their importance in understanding market growth. Massive changes were a feature of the market long before the recession started. For completeness you can see the value of some select currencies against the $US by quarter below:

… It is clear that, long before the turbulence of 2008, quarterly exchange rate fluctuations were often greater than reported market growth and that things have now gone crazy. I could go on, but this is just a blog….

Thanks for staying with this far. Perhaps you’re wondering why this is important to market research, the ICT industry and the economy in general. Well here are some vital reasons:

If you’re using international market research, your provider must be able to quote values in the currency of your choice and show the differences between ‘current’ and ‘constant’ views. In short, they must be able to extract currency variation from the market – otherwise you might discover that something going up was actually going down… and make very wrong investment decisions.

Filed under: Exchange Rate, How To Tagged: | America, Apple, Asia Pacific, Dell, EDS, EMC, Exchange Rates, HP, IBM, it-industry, Martin Hingley, Recession, Sun, UK