With the low, zero or even negative interest rates on offer today, opportunities to optimise cash surpluses are few and far between. Many corporates now accept that ROI has been replaced with RMI – Return My Investment. In a recent webinar hosted by Treasury Today, Thant Han, Chris Brown and Simon Derrick offered some words of wisdom.
Head of BNY Mellon Market Strategy
In Europe and the US, the investment environment is changing. A combination of rising interest rates and regulatory reform are creating a new investment paradigm that is offering both new opportunities and challenges.
In the US, regulatory reform has seen huge outflows from prime funds into constant net asset value (CNAV) ‘govie’ funds. Whilst the expectation is that this shift won’t happen to such an extent in Europe, corporate investors need to be aware of how the regulatory changes here will impact their investment activities.
For clients of BNY Mellon, the way its funds are managed means impending regulatory changes will create little in the way of impact. However, for most investors, there is a pressing need to be able to make informed decisions on what funds they want to invest in going forward: CNAV funds with government collateral, variable net asset value (VNAV) funds or the new low volatility net asset value (LVNAV) funds?
For the rare beast that is the cautious yield-hunter, with the gradual rising interest-rate environment creating opportunities for corporates to obtain some incremental yield pick-up, BNY Mellon is guiding investors’ gaze towards a more global outlook. Here, it says opportunities exist in the Dollar Bloc markets, such as New Zealand or Canada, where higher returns than would be available in Europe are possible without taking on extra risk.
But have treasurers generally got too used to a yield-free environment and become too risk-averse? A straw-poll of the audience revealed that, for the most part, corporates are still focused on security and liquidity above yield when it comes to their investment decisioning, with only 30% citing yield as the most important factor.
The likelihood of such an investment philosophy changing in the short-term is doubtful. A second poll of the audience – asking how they feel about their current investment policies – found that 50% were indeed either ‘cautious’ or ‘risk-averse’. A similar percentage remain concerned about negative interest rates or worried about counterparty risk exposures. Not one person said they felt optimistic.
The lack of audience optimism is indicative of a market-aware (and perhaps wary) audience. But BNY Mellon sees a wider band of market participants behaving almost bullishly. It cited as evidence the muted response to geopolitical issues, and the euro’s continuing appreciation in the face of negative media reporting. This, the panel felt, is an indication that some investors are so focused on achieving yield that they are prepared to shrug off the kind of issues that in the past would have triggered an immediate flight to safety.
This lack of judiciousness should be a concern for all stakeholders. The panel referred to recent comments about the reappearance of excessive risk-taking and the potential for bubbles to form in the markets. This suggests that whilst central banks are currently trying to instil calm in the markets, there is potential for significant volatility to return, especially if a policy mistake is made. Investors chasing yield should pay heed and start exercising caution.
Change is coming, albeit slowly. The wise investor should take time to reassess their risk appetite, recognise what their funds are doing and understand the processes that drive those funds. The opportunities are out there, but so are the risks.
If you missed the webinar and would like to hear the full recording: