Managing short-term investments is an important part of the treasurer’s remit, and treasurers in Asia have a wider range of opportunities open to them than ever before. However, today’s uncertain market conditions are also rife with challenges – so what should treasurers be aware of when devising a short-term investment strategy?
The area of short-term investments is something of a moving target. Regulatory change is one important consideration for corporate treasurers: developments such as Basel III have affected the value placed by banks on corporate deposits, while Asia’s diverse regulatory environment is often characterised by rapid change in individual markets. At the same time, companies which may have traditionally used bank deposits for their short-term investments are increasingly turning their attention to money market funds as a wider range of products has become available – and technology is also playing a role in opening up new investment opportunities.
In light of these developments, there are plenty of reasons why treasurers may choose to review their investment strategies. According to J.P. Morgan’s 2017 PeerViewSM study, almost half (47%) of respondents in Asia Pacific said that changing the investment policy requires ‘significant’ effort – for respondents in the Americas and Europe, in contrast, the same level of effort was reported by 21% and 20% respectively. But despite the effort involved, 33% of respondents in Asia Pacific said they were considering changing their investment policies in the coming six-12 months, given the current regulatory environment.
So which challenges are likely to shape treasurers’ short-term investment strategies in the coming year – and what factors will they need to take into account?
What’s in store in 2019?
Aidan Shevlin, Head of Asia Pacific Liquidity Fund Management at J.P. Morgan Asset Management, says that 2019 is likely to signal a turning point for global economics and interest rates – and that corporate treasurers “should be prepared for increased volatility and uncertainty, but also be ready to take advantage of emerging opportunities.”
Interest rates are, of course, a key consideration where short-term investments are concerned. Lewis Sun, Regional Head of Product, Global Liquidity and Cash Management at HSBC Asia Pacific, says that 2019 “will continue to witness modest interest rate rises in addition to those in 2018,” noting that this signals a further increase in cost of borrowing as well as better yield opportunities. As such, he says that the focus will continue to be on better visibility, control and managing funding efficiently. “Depending on the geographical, structural footprint of the cash balances, treasurers will likely look to consolidate funding centrally or optimise cash positions notionally where permissible,” he adds.
François-Dominique Doll, Director, Global Treasury Advisory Services at Deloitte, also highlights the significance of rising rates. He says that after a long period of low yield in major currencies and accommodating policies from central banks, “money market rates globally are now following an upward trajectory that was initiated two years ago by the Federal Reserve Board with the gradual increase of interest rates.”
As such, Doll says that cash-rich corporations can benefit from higher yields and better diversity in product offerings in order to place their surplus. “As Asian companies usually hold large amounts of USD, they can directly invest the surplus cash without the need to convert their balances,” he adds, noting that a number of Asian currencies are linked and pegged to the USD, and are following this upward trend.
Treasurers will also be monitoring macroeconomic developments and seeking to understand the possible impact that these can have on investment conditions. Alan Huse, Head of Payments and Cash Management at ANZ, says that volatility and uncertainty are the overriding challenges, pointing out that the geopolitical climate “is creating massive volatility and uncertainty” in light of topics such as Brexit, the US/China trade war and unrest across France.
Charles Evans, Head of Funding and Middle Market Sales, Markets at ANZ, says that if global trade tensions around the outcome of Brexit continue, “then risk-off sentiment in investment markets may prevail.” He adds, “In this environment cash allocations may rise – hence access to short-term liquidity by banks and balance sheets may improve, reducing repo levels and thus levels on short-term securities (this could be counter to rising term funding costs).”
At a global level, Huse says that macroeconomic issues “centre around the US Fed and the impact of rising US interest rates” – but there are plenty of other developments to be aware of. “In Australia, we’re seeing a downturn in the property market and possible impact on interest rates,” he says. “Asia treasurers, in particular, face increased levels of foreign exchange risk due to the multiple currencies involved.”