Funding & Investing

Short-term investments in turbulent times

Published: Jan 2021

The COVID-19 crisis has had a significant impact on the short-term investment landscape in Asia, from interest rate cuts to operational changes. As treasurers continue to focus on liquidity, what challenges and trends should they be aware of in the year ahead?

Big ocean wave breaking

If a week is a long time in politics, a year is a long time during a pandemic. Twelve months have passed since the world was first alerted to the discovery of a novel coronavirus in Wuhan – with the resulting crisis bringing unprecedented disruption for people and businesses around the world.

During this time, treasury teams have been affected in numerous ways. Alongside the surge in remote working, the crisis has also led to myriad challenges and changes, including supply chain disruption, currency volatility and rising levels of cybercrime. And above all, the crisis has led to a heightened focus on the importance of liquidity.

Aidan Shevlin, Head of Asian Liquidity Fund Management at J.P. Morgan Asset Management, notes that ensuring sufficient liquidity was a key priority early in the crisis, triggering a flight to cash in March and a jump in interest rate volatility. “Having ready access to liquid cash was critical – especially as secondary market liquidity disappeared and banks were increasingly reluctant to trade bonds or release deposits early,” he says.

Subsequently, Shevlin continues, treasurers were focused on having sufficient funds to weather extended periods of lockdown and lower revenue. “Raising cash in the bond markets or via bank loans was important to keep business operating during an uncertain future,” he says. “This meant that treasurers were managing significantly more cash than normal, much of which would be held for several months or even years.”

Beyond the focus on liquidity, the crisis has had other implications for short-term investments in the region:

  • Interest rate cuts.

    Venkat ES, head of Asia Treasury Product, Global Transaction Services at Bank of America, points out that a number of central banks cut policy rates to historic lows, causing low yields in many of the preferred investment currencies. “This resulted in a significant hit in the yield pick-up for short term investments,” he says. “Corporations are also concerned whether COVID-19 will trigger the credit downgrade of banks and investments that was witnessed in the 2008 Global Financial Crisis. As such, there is a greater emphasis for companies on striking a good balance between security and liquidity vs yield when they decide on their investment policies and execution.”

  • Operational changes.

    Operationally, Venkat explains, the arrival of lockdowns and extended work from home arrangements has led to an increased move towards digitalisation and the management of short-term investments using online methods. “Cybersecurity procedures and processes were also adopted and implemented in quick time to ensure investments are managed efficiently,” he adds.

Stepping up

Against this backdrop, treasurers have had to adapt rapidly to highly challenging conditions, while also keeping in mind the complexity of Asia’s diverse markets and regulatory considerations.

“The primary goal of treasurers is to ensure an institution’s cash is liquid and secure,” explains Shevlin. “Having immediate access to cash to pay bills and expenses as they fall due is critical.” He adds that ensuring cash is liquid – in other words, matures within one or two days – required several steps: “Treasurers sold more illiquid assets (or let them mature and did not roll them); they reduced risk in cash portfolios; and they increased the cash portfolio diversification across multiple different banks and products (including liquidity and money market funds).”

In addition, Shevlin says, treasurers have helped raise funds by issuing bonds or drawing down bank credit lines. “Lower interest rates and specific schemes by central banks have helped make this more affordable and easier for treasurers,” he notes.

One specific observation to call out is that COVID has been the catalyst for many treasurers and corporate boards to review their sustainability commitments, given the increased amount people of spent working from home – making note of things that should not be taken for granted, like travel.

Lewis Sun, Head of Product, Asia Pacific, Global Liquidity and Cash Management, HSBC

Efficiency and consolidation

Internal sources of liquidity have also been an important consideration for organisations across the region. Venkat says that treasurers have been focusing on internal efficiency and consolidating funds across departments, entities and geographies “to get better visibility and control on available funds, so they can utilise them for cash flow needs before considering any short-term investments.”

In addition, he says, they have reviewed their investment policies, risk frameworks and funding forecasts and have taken actions such as:

  • Increasing the frequency of review on financial institution credit ratings, credit limits and exposures.
  • Rationalising relationship banks and streamlining accounts to core relationship banks and those that meet credit/counterparty policy requirements.
  • Moving from long-term to medium or short-term forecasting.
  • Reducing the weighted average maturity (WAM) of investment portfolios.
  • Carrying out more frequent reviews on how the investment strategy is performing, and making adjustments as required.

From sustainability to digitisation

Beyond the immediate focus on liquidity, the COVID-19 crisis has also affected short-term investments in other ways, driving a greater emphasis on the importance of sustainability and accelerating the adoption of automation tools.

“One specific observation to call out is that COVID has been the catalyst for many treasurers and corporate boards to review their sustainability commitments, given the increased amount people of spent working from home – making note of things that should not be taken for granted, like travel,” explains Lewis Sun, Head of Product, Asia Pacific, Global Liquidity and Cash Management at HSBC.

Sun adds that this introspection has translated into a more active search for financial products that are explicitly linked to a sustainability agenda. He cites HSBC’s Green Deposits solution which he says “has seen a strong pickup since its launch earlier in the year.”

In addition, Sun highlights the increasing need for digitisation as treasurers embark on treasury transformation projects, noting that automated investment of short-term liquidity is gaining popularity in the market. “In order to support investment decisions, corporates will demand real-time cash visibility and control to manage their short-term investments and adopt digital tools to meet their cash reconciliation, transparency and future cash flow objectives,” he says.

Venkat, meanwhile, predicts that innovative products being rolled out by banks and financial institutions, such as Virtual Account Management (VAM) and intelligent treasury and forecasting systems “will likely lead to a complete revamp of the traditional decision-making by treasurers on short-term investments.”

Changing landscape

As the crisis continues, the short-term investment landscape in APAC is continuing to evolve. J.P. Morgan Asset Management’s Shevlin observes that while markets have partially normalised, “the background to how treasurers manage an organisation’s cash has changed dramatically.”

For one thing, he says, lower interest rates are making it difficult to achieve a competitive return without assuming substantial duration and illiquidity risk. Also significant are changes to the range of issuers, instruments and counterparties.

The one compelling factor playing on the minds of the corporate treasurers is the likelihood of negative interest rates.

Venkat ES, head of Asia Treasury Product, Global Transaction Services, Bank of America

“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.”

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.

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.”

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