Treasury Today Country Profiles in association with Citi

EMEA cash reserves approach €1 trillion

Man cliff diving into the ocean

As the cash reserves held by corporates in EMEA hit a record high of nearly €1 trillion, many companies are now looking to invest some of this cash to fund their growth over the next year and beyond.

Cash reserves held by corporates in Europe, Middle East and Africa (EMEA) have reached a new high of nearly €1 trillion, according to research published last week.

In its ‘Cash to Growth: Pivot Point’ research report, professional services firm Deloitte found that the 1,200 listed companies in the region have built up their cash reserves by €47 billion over the past year, bringing total cash reserves to €963 billion. This represents an increase of around €250 billion on the reserves recorded in 2007.

“Listed companies on a global basis have rapidly increased the amount of cash they are holding since the financial crisis,” Chris Gentle, Head of EMEA research, Deloitte, tells Treasury Today. “This research shows that corporates in Europe have been adopting similar behaviours to those in other regions by taking a very conservative position in stockpiling adequate cash reserves.” He adds that non-listed companies have exhibited similar behaviours in building up their cash reserves.

Interestingly, the findings also show that 75% of cash reserves in EMEA are held by 17% of corporates in the region, which is similar to the trend of corporate cash concentration worldwide (approximately a third of companies hold 80% of the world’s $3.5 trillion corporate cash reserves).

Almost 60% of those surveyed said they intended to invest part of their cash reserves in the coming year. Of these corporates, 54% said growth would be the main focus of their investment strategy over the next year.

Growth back on the agenda

“This is good news in that growth is back on the agenda, although this needs to be considered in the context that confidence is still relatively brittle,” says Gentle. “As companies take a longer-term view and prioritise growth, this brings about two concerns. One relates to the amount of capital expenditure going into maintaining their existing assets. The other is whether what they are planning to invest will actually be sufficient to sustain long-term growth.”

The report highlights that since 2010, 41 European companies have left the Global Fortune 500, which is the most rapid decline on record. “If that is a proxy for our business competitiveness across Europe, this is another cause for concern,” says Gentle. “The ability of European corporates to get growth rates to a level that will allow them to compete on a global basis is a key factor.”

The research also suggests that corporates in EMEA are looking to invest cash reserves primarily in their home markets. Thirty-five percent of those surveyed said they would make investments within the EU over the next year, while 27% said they would in North America, and 21% in China. However, despite the recent boom in interest in emerging markets, respondents showed relatively little enthusiasm for investing in these markets. 13% of the companies surveyed said they planned to invest in Brazil, 8% in India and 4% in Russia.

Interestingly, the research also touched on corporates’ opinion of government incentives to encourage growth. Across all sectors and countries covered by the survey, government incentives were ranked as having the least impact on companies’ investment decisions. However, the executives surveyed did consider stability important, as well as a degree of certainty in the regulatory environment.

“There is a strong message for policy makers,” explains Gentle. “It is very clear that companies are looking for a stable macro environment in which to make investment decisions. There is much less support for smaller-scale government initiatives.”

Optimising growth

The report concludes with five recommendations to help corporates optimise growth:

  1. Appoint a Chief Growth Officer (CGO).

    Deloitte says the role of a CGO goes beyond marketing and branding and should focus on bringing growth strategies together. It adds that the CGO should also be responsible for creating and implementing innovation strategies.

  2. Review organic and inorganic strategies.

    According to Deloitte, this review should lead to a five-year vision which forecasts the level and pace of growth.

  3. Review board and management capabilities.

    Deloitte says this should help corporates to be well positioned to take advantage of rapid changes in the marketplace.

  4. Hothouse growth.

    Deloitte also recommends that corporates have innovation and venturing capabilities in place to cope with fast-changing competition models.

  5. Risk and reward.

    According to the report, corporates can deal with risk if they have clearly defined risk awareness and management procedures in place.