Funding & Investing

Short-term investments: navigating uncertainty

Published: Feb 2019


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.”

Rising rates

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.

Economic conditions

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.”

Weighing up security, liquidity and yield in challenging times

Venkat ES, head of Asia Pacific Treasury Product Management, Bank of America Merrill Lynch, explains that faced with uncertainty and market volatility, treasurers will focus on security, liquidity and yield – known as the ‘SLY’ principle – while ensuring that their investment policies remain flexible enough to deal with changes. He notes that the key priority “is to establish accurate forecasting for cash segmentation, real-time visibility of their liquidity positions and having the right skill set to invest. All these can be supplemented with technology.”

Venkat says that security and accessibility of cash will be treasurers’ primary concerns during challenging times. “Excess liquidity would most likely be deposited in demand deposit accounts, short-term time deposits or money market funds,” he says. “Treasurers would be looking to ensure surety of the principle deposited and thus, key considerations would be counterparty risk and market risk.”

He adds that treasurers are likely to consider the following when weighing up security, liquidity and yield:

  • Capital preservation. Treasurers want to ensure capital preservation. They have learnt from the past financial crisis the importance of selecting their counterparties carefully and distributing their investments so as to mitigate the risks of non-return of their deposits upon maturity. Market risk is also the other important consideration as treasurers want to maintain the value of their deposits regardless of interest rates. As such, there is a preference for shorter-term investments, rather than longer-term, to mitigate both risks.
  • Liquidity. Another consideration is liquidity eg how quickly can investments be converted to cash if required and the associated costs. From that perspective, treasurers may prefer placing funds in ‘on-demand’ accounts and short-term time deposits which offer lower charges and quicker access. Money markets investments may take longer to convert and are likely to be more expensive. Treasurers also require further analysis such as understanding the secondary market where their money market investments are operating in before making decisions on liquidating the investments. Generally, treasurers with dedicated in-house expertise may still consider such investment options as it requires a lot more understanding of the risks.
  • Yield. Yield, while still important, would likely to be of lower priority in a volatile environment. The consideration of yield may take a back seat as treasurers’ concerns on liquidity and cash flow take precedence.

Challenging times

Against this backdrop, Deloitte’s Doll says that treasurers will face two types of challenges in the coming year. “The first challenge is ensuring that risks are managed properly by keeping short-term investments liquid and convertible at any point in time,” he says. “As the offering is also more diverse, closer control on counterparty exposure and review of policies might be required at the group level.”

The second challenge, he explains, relates to regulation. One area of interest where regulators are concerned is that of money market funds, which have gained considerable popularity in recent years. AUM in China’s money market funds doubled between 2016 and 2017 and stood at RMB8.6trn as of the end of June 2018, with growth predominantly driven by retail demand, according to research by Fitch Ratings.

In other regions, money market funds have seen considerable regulatory focus in the last couple of years, including the MMF reform adopted by the US in 2016 as well as new rules recently introduced in Europe. Doll explains that money market fund reform in the US has focused on ensuring quality of assets, while a change in the NAV calculation for funds “has created a principal reduction risk which was new for traditionally ‘safe’ investments.” He notes that boundaries have also been set to prevent a sudden run on assets through specific liquidity fees and fixing a period where funds cannot be redeemed.

With China’s money market funds growing rapidly, regulatory attention is likewise focusing on bolstering the market. In 2017, the China Securities Regulatory Commission (CSRC) issued rules designed to reduce concentration risk and increase diversification of investments. Last year, the CSRC issued further rules limiting same-day redemption of withdrawals to RMB10,000. Doll observes that regulatory developments such as the CSRC’s recent changes “have an impact on the liquidity component of the funds.”

Areas of opportunity

Alongside the challenges, developments in technology and product offerings are providing new opportunities for treasurers to manage their short-term investments more effectively. Doll says that a number of banks have provided liquidity portals which enable customers to pick and choose from a list of money market funds. “While the volume of deposits would decrease, banks would still be able to capture this liquidity in the market and keep the customer relationships,” he adds.

Technology solutions and innovation likewise represent an area of opportunity. “Online dealing portal providers are able to allow integration of short-term investments instruments to their treasury management systems,” says Doll, adding that there is stronger demand for better integration of data and trades. “We anticipate that machine-learning based innovations will be able to provide online recommendations of short-term investments based on currency, amount, tenure and counterparty limit,” he adds. “A number of fintechs are developing solutions in this direction.”

Treasurers need to ensure they have multiple and diverse sources of funding available, while at the same time simplifying their cash management to have better visibility and control.

Alan Huse, Head of Payments and Cash Management, ANZ

Achieving flexibility

Flexibility is particularly important in times of uncertainty: the more dynamic a company’s investment strategy, the better placed the company will be to adjust to changing market conditions. Consequently, in 2019 some treasurers may be more open to investment instruments that provide greater levels of flexibility.

Against a backdrop of rising interest rates, HSBC’s Sun points out that surplus balances are likely to attract better yield. As such, he says that deposit products that provide flexibility of investment, access and yield, rather than contractual deposits, are the likely choice for treasurers. “Should markets remain volatile, cash and bonds will continue to be in favour and banks like HSBC provide a wide array of products from deposits that allow flexibility to on and off-balance sheet short-term investments,” he adds.

Indeed, not all deposits are alike. Doll says that rather than placing cash in term deposits, “we have seen companies simply receiving fair interest rates on savings accounts offered by the banks. There is also a push in some of the Asian countries around structured deposits which allow enhanced yield with an optionality component.” He adds that treasurers should closely analyse product fact sheets and assess whether the risks introduced are acceptable to their own policies.

While deposits are widely used by treasurers in the region, money market funds can also be an attractive option for treasurers looking to achieve greater flexibility in an uncertain market. Doll says that there is a wider product offering on short-term investment products that leverage bank channels and online dealing portals, while assets under management statistics show growing balances for fund managers. “Traditionally, money market funds have been mainly available in major currencies, but they are now available for some Asian currencies,” he comments. “The flexibility in execution and processing is quite appealing for companies looking to streamline their treasury operations.”

How to navigate the market

With so many changes to take into account, it is even more important to make sure the company’s short-term investment strategy continues to suit the demands of evolving market conditions. With that in mind, experts suggest a number of actions that treasurers may wish to consider in the year ahead:

  • Diversify and simplify. Huse recommends that treasurers “need to ensure they have multiple and diverse sources of funding available, while at the same time simplifying their cash management to have better visibility and control.”
  • Take advantage of technology. Huse points out that companies, like banks, “will need to be alert to the opportunities presented by new technologies”. With banks continuing to introduce more sophisticated tools that can provide customers with greater visibility and control over their liquidity, treasurers “should engage their banks to ensure they have access to the latest and best tools available.”
  • Take advantage of emerging opportunities. J.P. Morgan Asset Management’s Shevlin says that treasurers should focus on three key steps: “Increasing their familiarity with new money market regulations and investment options; strengthening their counterparty and credit risk analysis tools; and segmenting their cash to benefit from interest rate divergence, higher returns and more controlled risks.”
  • Pay attention to changes in market yields. “In a rising rate environment, keeping cash short rather than locking them in for long tenures is a good strategy,” comments Kheng Leong Cheah, Head of Global Liquidity Sales, Asia Pacific at J.P. Morgan Asset Management. “Also, working with an asset manager with strong track record of investing in the respective local market to help navigate through market volatility and in certain countries, evolving regulatory environment, would be prudent.”

In light of the evolving market conditions, treasurers may also opt to review the company’s short-term investment policy, which sets out the counterparties and investment instruments that can be used as well as stipulating any limits. In practice treasurers are unlikely to change the investment policy too frequently – but it is still important to make sure that the policy continues to be tailored to current market conditions. This may involve looking not only at the products the company is currently using, but also at additional products that could be required in the future.

In conclusion, while the range of short-term investment products available in Asia has expanded in recent years, treasurers also have to negotiate a variety of challenges across the region, from economic uncertainty to regulatory change. As such, it is essential to have a clear understanding both of the obstacles and of the possible opportunities arising from rising rates and technological innovation – and to consider any strategic adjustments that can be made to harness those opportunities.

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