“Banks need less funding (due to central bank lending programs and falling loan demand), while corporates are borrowing further out the yield curve,” says Shevlin. “Therefore treasurers need to be more cognisant of credit risk and diversification risk.”
Meanwhile, Shevlin says, volatility remains higher than it as previously – “so treasurers cannot be as reliant on selling securities to ensure liquidity. Better to improve cash forecasting and ladder maturities to meet liquidity requirements.”
Trends to watch in 2021
Where the year ahead is concerned, BofA’s Venkat highlights some key trends that are expected, including a preference for short-term or overnight investments due to the importance of maintaining higher liquidity levels as a buffer when cash flows are uncertain. He also predicts a reallocation from money market funds to other short-term investment products, “due to falling yield as well as increased focus on security and liquidity.”
When it comes to evaluating investments, he expects this will no longer be carried out through the metric of yield pick-up only. Instead, he says, it will be “a holistic proposition across available liquidity and real-time (or near real-time) access to funds, level of automation in placement and redemption, quality and frequency of reporting available (including new technologies like API) and market/counterparty risk exposures.”
Sun, meanwhile, predicts that as the interest rate environment remains challenging over the coming months, there will be a focus on innovation in terms of the types of solutions available. “We foresee that banks will develop and provide new ways for clients to invest that are aligned to sustainability and client ESG policies,” he says.
Navigating short-term investment challenges
For treasurers looking to manage their short-term investments effectively in APAC, there are some important considerations to bear in mind. As Shevlin notes, “While there are hopes that the global economy can normalise as vaccines are rolled out, this could take some time – meanwhile, second and third waves of the virus are causing additional challenges.”
In this uncertain climate, the focus for treasurers, as always, will be on balancing the need to preserve capital against their liquidity and yield requirements. At the same time, treasurers will need to ensure that their investment policies remain up-to-date and suited to their companies’ specific needs.
As Shevlin explains, “A well-written policy provides clarity, instils discipline, and allows the organisation to successfully navigate shifting markets, changing regulations and evolving business needs. Treasurers should also be defining short term investment objectives and the strategies for achieving them. In the post-COVID-19 world this can help establish acceptable levels of risk, identify permissible investments and detail relevant constraints.”
He also points out that segmenting cash allows organisations to optimise their investment choices by ensuring they have enough liquid cash available to meet their daily needs, while avoiding the opportunity costs associated with very high levels of liquidity and protecting the principal. “This is achieved by diversifying across different types of cash investment, depending on their level of liquidity, volatility and diversification,” he says.
In the year ahead, Venkat notes that treasurers should be cognisant of the need to build flexibility into their liquidity plans when weighing different short-term investment options. Meanwhile, he notes that there continues to be uncertainty around the direction of interest rates and inflationary trends, both regionally and globally. “While planning their investment policies and options, a key consideration should be risk diversification,” he says, adding that better rated banks and instruments will be under greater focus as treasurers decide how to invest their surplus cash.
Last but not least, he warns that treasurers should be prepared for the prospect of a negative interest rate environment as central banks around the world work to prevent a long-lasting recession. “The one compelling factor playing on the minds of the corporate treasurers is the likelihood of negative interest rates,” he comments. “Treasuries need to have a robust strategy and plan in place on how they will manage the investment of such currencies when interest rates turn negative, mainly US dollar.”