Companies are supported by strong balance sheets and have significant opportunity to deploy capital to strategic investments, yet many have a cautious approach to investment due to geopolitical uncertainty, said Shoaib Yaqub Standard Chartered Global Head of Capital Structure & Rating Advisory speaking in a recent webinar presenting the banks fourth annual CSRA publication that reviews key thematic trends.
Sharing analysis drawn from 950 global corporates across 18 different sectors, Yaqub said many companies continue to hold substantial cash reserves despite rising interest rates, an inflationary environment and a stable credit outlook. This conservative approach appears to be influenced by ongoing geopolitical uncertainties.
He argued that while prudent risk management remains important, the current market environment offers unique opportunities for organisations to strategically deploy capital effectively and decisively to enhance shareholder returns. While this cautious approach provides near-term security, it could impede long-term competitiveness and value creation in today’s geopolitical environment.
Yagub flagged three factors shaping strategy. After major hikes and recent easing, central banks face an uncertain interest rate trajectory for 2025. They are treading a delicate balancing act between keeping inflation at bay and encouraging growth as political and economic uncertainty persist. Corporates are also focused on the impact of potential import tariffs, especially between the US and China, which may complicate cross-border trade and profitability in various sectors. Treasury teams are also navigating varying momentum around ESG, especially in hard-to-abate sectors.
“Eight of the 18 sectors analysed are likely to be affected by one or more of these factors, with some exposed to inherent volatility. Ensuring their financial strategies have sufficient headroom could be crucial in navigating the challenges ahead,” he said.
Earnings are significantly stronger than last year which would suggest many companies are positioned to explore investment. However, the increase in earnings is not necessarily translating into proportionate growth in cash distribution yields from dividends or buybacks. These have remained stable or dipped across most sectors, suggesting shareholder returns may not be keeping pace with company growth.
This caution is also apparent in M&A spending, which is broadly similar or lower for most sectors the report analysed. Only capital goods, pharma, tech software and tech hardware sectors bucked the trend with pharma standing out with the highest M&A spending of all sectors.
Working capital
Yagub noted that working capital cycles are down while excess liquidity persists. As a result, corporates expanded cash buffers further in 2024 which are now running 21% higher than in 2019. The analysis reveals working capital days have deteriorated, with six of the 18 sectors experiencing their most inefficient cash conversion cycles (CCCs) since 2019.
“Corporates must address these inefficiencies, as efficient CCCs generally help support higher Return on Invested Capital (ROIC), and valuation multiples,” he said.
For corporates navigating volatile sectors, maintaining cash buffers can be crucial for weathering potential fluctuations. However, businesses with ample debt headroom should seize the current market momentum and act more decisively. Streamlining working capital and addressing liquidity inefficiencies can be tackled relatively easily. “Prioritising cash cycles and refining sustainable cash buffers should be at the forefront of most sectors’ minds,” he said.
In another trend he said corporate treasurers are thinking about debt from a new reality and are not “waiting around” for lower rates. However, corporates are pondering what to borrow for, unsure about share buyback strategies, increasing dividends or bold investment.
“Corporates are able to access capital on good terms, margins are low, and markets are open for a number of corporates, but they are unsure about what to do with their debt,” he said.
Yagub noted integrating ESG has become both confusing and more complex for companies in hard to abate sectors.
Although ESG ratings have improved for many sectors, he noticed a large gap between how developed market corporates present ESG ratings and emerging markets. These sectors can benefit from re-telling their ESG rating and disclosure story, communicating to investors how they are mitigating their risk exposure, he said.
