Treasury Today Country Profiles in association with Citi

Understanding the short-term investment landscape

Stock market trading graph

Regulatory changes such as Basel III have affected the way that banks view operational and non-operational deposits, while low interest rates and the rise of money market funds are also impacting treasurers’ short-term investment decisions. What are treasurers looking for in the current market – and how important is it to review existing policies?

Central to the treasurer’s role is the task of ensuring that short-term cash is invested effectively – but what that looks like can vary from company to company, for a number of reasons. For one thing, regulatory developments such as Basel III are continuing to affect the way in which banks view deposits. Meanwhile, the types of product on offer are not set in stone – and treasurers’ investment goals can change over time as a result of evolving market conditions as well as changes to their business models.

Challenging investment landscape

For treasurers, the current short-term investment landscape presents certain challenges. The low interest rate environment has made it increasingly difficult for treasurers to achieve any meaningful yield from their short-term investments. At the same time, regulatory change – most notably the arrival of Basel III – has had an impact on the value that banks place on certain types of corporate deposit.

“The effects of Basel III regulation continue to be felt in money markets across developed countries,” comments Gordon Rodrigues, Fund Manager at HSBC Australia Liquidity Fund. “Basel III introduced new requirements to the way banks assess their funding sources from a liquidity (ability to withstand severe illiquidity for 30 days) and ALM/stability of funding (asset and liability tenor mismatch) point of view. The implementation of these rules is expected to be completed by 2019.”

Rodrigues notes that the impact on markets and investors has included a continued reduction in banks’ appetite for short-dated deposits as implementation progresses. “Investors are being asked by their banking partners to clearly define what is operational cash (versus non-operational), and different rules are applied to each, depending on the depositor category you fall into,” he says.

As such, Basel III has given rise to a more pronounced distinction between deposits which are used for daily operations and non-operational deposits. In many cases, the new rules make it unattractive for banks to accept the latter, as there is a greater risk that non-operational cash could be withdrawn if a liquidity crisis were to take place.

Treasurers in Asia also face additional complexity where short-term investments are concerned. “Asia’s short-term investment market is far from uniform,” says Aidan Shevlin, Head of Asian Liquidity Fund Management at J.P. Morgan Asset Management. “Each country is at a different stage of development, with its own regulatory environment, market practices and investment instruments. And with the vast majority of multinational corporations operating in more than one of these markets, this complexity is something that treasurers cannot avoid.”

Priorities, priorities

In practice, bank deposits continue to be the product of choice for treasurers across Asia. “Most of the corporates in Asia prefer to invest their short-term cash in bank deposit products,” comments E-May Neoh, Asia Head of Liquidity and Balance Sheet, Global Transaction Services at Bank of America Merrill Lynch. “This is because it is a safe investment and it is simple to understand and explain.”

Where investment priorities are concerned, Neoh observes that “all treasurers want their investments to be secure, liquid and with high returns, typically in this order.” As a result, she says that most treasurers in Asia are content with placing short-term cash with their relationship banks as the three criteria are met. “We often see local or regional banks in Asia offer highly competitive rates for bank deposit products, which provide less incentive for corporate treasurers to look for alternative investment tools,” Neoh adds.

Indeed, while the pressures brought by Basel III are being felt around the world, it’s worth noting that corporates may face less pressure to move their cash deposits off balance sheet in Asia than in other regions. The 2017 J.P. Morgan Global Liquidity Investment PeerViewSM survey found that only 17% of respondents in Asia Pacific had been encouraged to move their cash deposits off their balance sheets as a result of factors such as Basel III – compared to 55% of respondents in Europe and 36% of those in the Americas.

Meanwhile, some banks in the region may offer solutions enabling treasurers to achieve higher interest rates than would otherwise be available. Neoh notes that most large multinational corporates have one or two key cash management banks in the region to manage their day-to-day operations, which are also likely to act as liquidity management providers. “Due to the regulatory landscape in Asia, excess cash in some of the restricted markets can only be invested onshore,” she says. “Some banks do offer interest optimisation solutions, where the bank will agree to pay a higher interest rate in each market based on a pre-agreed aggregated balance level.”

Q&A

 

Portrait of Christopher Emslie

Christopher Emslie

Asia Regional Treasurer
Could you give me an overview of your role and your team in Asia?

The treasury department at General Mills in Asia is quite new. I’ve been involved for six months and I’m building up the treasury team – I’ve got people in India and China at the moment, but in Singapore it’s just me. We’re currently focusing on cash management and putting the policies in. I previously spent ten years with ABB running treasury first in Africa and then in Asia, here in Singapore.

What is your strategy in the area of short-term investments?

We didn’t have a strategy up to six months ago – our strategy was pretty much to keep the money in the bank, although we were using money market accounts in China and Hong Kong for any overflow of liquidity.

Working with the treasury departments in Europe, we’ve now put a new policy in place – we’ve changed our investment focus to try and get a return on investment and have a more structured approach to what we do with our excess cash. We’re an American company, so a lot of our cash now goes back to the United States, but any excess cash is now going into an investment portfolio and we’re looking for the best returns now.

I’ve spent a bit of time with the banks trying to understand how the landscape is changing and where we can get the best return, considering that interest rates in the region are so low. It’s not like it used to be ten or 15 years ago when you could earn a really good rate of return, but you still want to be in a favourable growth position and get something back.

How is the short-term investment landscape in Asia Pacific changing?

The short-term investment landscape is definitely changing – there are far more opportunities for good investments and the banks are starting to make far better offers and have new product offerings in the region. In particular, we’re starting to see more products come to market in Hong Kong and China – we have a lot of excess cash sitting in China at the moment, so that’s given us opportunities to invest there.

Are you facing any particular challenges where short-term investments are concerned?

Yes – I think the biggest issue at the moment is regulation. In Asia there’s always the worry that you will go through various stages and outline a plan, and then six months down the line the regulations will change. But I think it’s become far more stable recently. Everything else is pretty straightforward.

How often do you plan to review your short-term investment policy?

We have just updated our investment policy – the policy we had was about ten years old, so we’ve totally rewritten it to take in as much of the newer landscape and the newer regulations as possible. We will continue to update it every three to six months as the landscape changes. The goal will be to update the policy when regulatory changes take place and make sure that it remains relevant, rather than necessarily aiming for broad strategy changes.

Are factors such as Basel III and in-country regulatory change prompting you to adjust your short-term investment policy and goals? If so, how?

Yes, there has been a lot of conversation around the changes and the impact to our strategy – it’s just made us more proactive and made us have a vested interest in our strategy as the changes come into play, both from a regulatory and an in-country perspective – especially in markets where we have liquid cash that can be utilised.

Weighing up money market funds

While bank deposits are still the most common short-term investment option for corporates in Asia, money market funds have become a more attractive option in recent years. “Money market funds (MMFs) have increasingly been looked at as an alternative,” comments Neoh. “However, the size of the MMF for some of the Asian currencies continue to be more for retail investors rather than institutional investors.”

Nevertheless, MMFs are playing an increasingly important role for many treasurers in Asia Pacific. “One of the key changes in Asia Pacific’s short-term investment landscape over recent years has been the growing internationalization of the region’s money market fund industry,” says J.P. Morgan Asset Management’s Shevlin. He notes that traditionally, the options treasurers had for investing surplus liquidity would have been of a very small number, limited mainly to bank deposits. “Global treasurers new to the region typically chose to work with the largest banks in each country because the financial systems in Asian markets were not very sophisticated,” he adds.

However, Shevlin says that with MMFs boasting increased liquidity and size, the short-term investment options available to treasurers have increased significantly. “The range of products and instruments available has grown and developed, while the level of market flexibility has increased; this makes money market funds a very valuable tool for corporate investors in the region,” he says. “MNCs have the comfort of a product that they are familiar with, while local corporates can move more in line with global standards.”

The market for MMFs is experiencing considerable growth in China. In December 2014, AUM stood at RMB1.96trn. By November 2017 this had reached RMB6.8trn, according to figures published by the Asset Management Association of China (AMAC). Shevlin observes that the popularity of money market funds in China is “quite unique”: “When compared with returns on other investment options such as equities and fixed income, which have been quite volatile, money markets have posted fairly solid returns in China, with rates averaging between 4% to 7%,” he comments.

Updating the investment policy

In light of this changing landscape, treasurers may take the opportunity to review their short-term investments and consider what they are looking to achieve. This may include updating the company’s investment policy, which sets out clear investment goals as well as stipulating which investment instruments and counterparties are approved.

Shevlin points out that many corporates which are fairly new to the region follow an investment strategy which is guided by a policy drafted at the company’s headquarters in the US or Europe. “Although this strategy can work to a certain degree, especially in the region’s more developed markets like Singapore and Australia, ultimately it is not viable in the long-term and may see the business exposed to unnecessary risk, resulting in missed opportunities,” says Shevlin. “A similar issue arises around credit ratings. The development nature of the markets in Asia means that many countries are not rated this highly – China’s rating, for instance, is AA.”

He also notes that companies may expand the range of short-term investment vehicles that they use over time, explaining that most corporates in Asia tend to start investing cautiously in the region, primarily using time deposits with safe banks. “As they become more comfortable with the region and its rules and regulations, they eventually start branching out and use other instruments,” he says.

A company’s investment policy may not be set in stone – but changing that policy is not always straightforward. Indeed, J.P. Morgan’s 2017 PeerViewSM survey found that changing the investment policy is considerably more difficult in Asia Pacific than in the other regions surveyed. According to the report, 47% of respondents in Asia Pacific reported the level of effort required to change the investment policy as ‘significant’, compared to 21% in the Americas and 20% in Europe. Nevertheless, it seems that more investors may be considering changing their investment policies than in the past. The 2017 survey found that a third of respondents in Asia Pacific were considering changes to their investment policy, up from 26% in the 2015 survey.

While treasurers do not typically make significant changes to their investment policies on a regular basis, it is nevertheless important to keep policies up to date with market changes. This might include both scheduled reviews and ad-hoc adjustments in light of regulatory changes and market changes such as interest rate movements. Likewise, the introduction of new products could prompt companies to include these in their investment policy – even if they may not use those products until further down the line.

In conclusion, as the short-term investment landscape in Asia continues to evolve, the challenges and complexities are being accompanied by new opportunities. In order to take advantage of these, treasurers need to remain up-to-date with developments in the market, while making sure that their investment policies continue to reflect both their investment goals and the evolving market conditions.