Insight & Analysis

Capital gains retreat in face of corporate concern

Published: Nov 2022

After a brief recovery in the global economy, working capital levels have risen again as corporates seek to insulate themselves from the impact of geopolitical events and rising inflation and interest rates.

Hot air balloon rising while others still on ground

A return to pre-pandemic levels of working capital among S&P 1500 companies was one of the key findings of J.P. Morgan’s 2022 Working Capital Index Report, prompted by increased sales and a subsequent reduction in inventory.

The report noted that these companies had begun to deploy funds strategically after a period of cash preservation and that more than two thirds had experienced an improvement in their working capital efficiencies – with the pharmaceutical, apparel and accessories, and automotive sectors among the industries showing the greatest improvement.

But this optimism has proved short-lived in the face of new challenges including the Ukraine-Russia conflict and rising interest rates, which have further disrupted global supply chains and increased the costs of financing.

“Businesses are still feeling the impact of the pandemic on their supply chains, which is more apparent in some industries than others,” says Adnan Ahmad, Head of Liquidity Products Europe, Global Payments Solutions at HSBC. “The fear of recession is compelling treasurers to focus on liquidity and hold on to cash. With interest rates on the rise, companies will continue to reduce trapped cash by bringing in efficiencies in purchasing cycles and how they manage/invest cash.”

This discrepancy across industry sectors is also evident regionally, with businesses in Asia acting on their expansion plans amid rising demand according to Maisie Chong, Head of Transaction Banking Singapore and Head of Trade and Working Capital ASEAN at Standard Chartered.

“However, they are also stocking up on inventory to align to a just-in-case strategy and refining their distribution plans to counter any global supply chain risks,” she says. “To stay prepared, businesses are managing their working capital more prudently and ensuring that liquidity and working capital are higher than pre-pandemic levels.”

In an environment of rising interest rates, cash-rich corporate treasurers are seeking investments with the highest yield of returns and at the same time looking to pay down on high-cost trade loans before their maturity.

“We have seen corporates shift their focus from cash preservation during the pandemic to cash deployment to support their business growth,” adds Chong. “However, amid the outbreak of various political events and rising risks of a recession, we expect companies to manage their cash reserves more cautiously going forward.”

In terms of working capital efficiency, the consumer products and retail sector has shown a significant improvement on visibility and transparency of supplier-related risks while the high tech and commodities sectors have been pushed to increase inventory levels and develop and implement strong resilience measures explains Jan-Philipp Gillmann, Global Head of Coverage at Deutsche Bank.

“Within ASEAN, sectors such as e-commerce, technology and semiconductor have been generally unaffected by the pandemic due to the nature of their goods and services as they continue to support companies and consumers in their digital journeys,” says Chong.

As such, these companies have relatively low debt levels and high amounts of cash that they are actively deploying to drive growth across the region.

The J.P. Morgan report estimated that US$523bn of liquidity remained trapped within the supply chains of S&P 1500 companies at the end of last year, up from US$507bn in 2020.

“Banking institutions can support corporates to minimise the liquidity trapped within their supply chains by roll-out of global payables finance programmes and implementation of innovative receivables finance techniques and inventory finance solutions,” says Gillmann.

Some smaller companies may have larger cash reserves compared to their multinational counterparts that need to balance their support for global business growth with the need to preserve cash. Ultimately, companies need to stay focused on their goals and learn from previous black swan events.

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