A leading expert, who does not wish to be identified, has two nuggets of wisdom: One, evaluate your cost of hedging with respect to what you see as a downside potential to your current position. Though expensive, it may help companies to see if they can cover their current position for another 10 to 15 per cent fall. However, if the company feels the cost of hedging is going to be high then it may be better to wait and see how the market will pan out. Two, treat this as a good time to invest in these economies because such investments will create natural hedges. It may be even better if you are able to enter into an attractive loan-type of arrangement wherein you take a loan to either buy a company or build a facility in that country. This will help balance out your exposure in these markets. Taking measures on these lines would be crucial as the currency turmoil has become a matter of concern.
Consider this: these markets constitute about 20 to 25 per cent of total sales for many leading Indian companies and these include the likes of Cipla, Dr Reddy's, Glenmark, Torrent and Sun Pharma, the last one thanks largely to the market it gets due to acquisition of Ranbaxy.
If you are looking for signs of the severity of the problem: Take the Brazilian real for instance. This, going from 2.8 to 3.8 against the dollar, means if a company was earning 100 million from Brazil last year, this figure is now down to 40 million. Other than India, the three key emerging markets where the currency turmoil is causing concern are Russia (ruble), Brazil (real) and South Africa (rand). Look closely and there is a link node of commodity-linkage impacting these currencies. Movements in ruble are linked to oil prices, rand is linked to metals, especially copper along with diamond. Rial is also ,in some ways, linked to commodities and to oil.
Hedging therefore becomes bit of a challenge as one is in essence doing a hedge on these commodities and therefore could be expensive today as a hedge on ruble would be akin to predicting what will happen on oil prices. Similarly, in the case of rand trying to predict what could happen on copper, gold or diamond trade. But then, companies cannot sit quite also. After all, in just one year, it has moved from Rs 1.70 paise to a ruble a year ago to 98 paise to a ruble today.