As we have discussed recently, factors such as the Ukraine-Russia conflict and rising interest rates have encouraged many corporates to increase their cash reserves this year.
In this uncertain economic environment corporate treasurers with sizeable amounts of cash to manage are inevitably seeking investments with the highest level of return observes Jan-Philipp Gillmann, Global Head of Client Coverage at Deutsche Bank.
“We have seen an increasing demand for creative solutions when deploying their short-term cash and corporates have been reviewing their investment policies to facilitate instruments beyond the traditional safe havens of bank deposits,” he says. “In addition there has been a stronger demand to further improve and enhance the process of excess cash centralisation through cash pool automation and virtual accounts.”
But while some larger corporates have used derivatives to swap euro cash assets into dollars, this is not a strategy that has been widely adopted according to Gillmann, who says corporate clients continue to avoid increased complexity and remain generally uninterested in derivative solutions.
European corporate clients usually manage their cash in relation to their size. The bigger the company, the simpler the products – usually short term, riskless, with bank deposits the preferred option – whereas for smaller corporates with more concentrated shareholder structures, the risk and maturity of instruments can increase.
That is the view of Christian Seguineau, Societe Generale’s Global Head of Liquidity & Investment Solutions for Corporates, who explains that optimising treasury needs and future balances enables these companies to place longer-term deposits with a percentage of their cash (and a higher yield) without additional risk.
“We have seen an increase of duration in corporate deposits as a way to capture higher returns and fight inflation,” she says. “The products tend to remain the same – mostly bank deposits, with longer maturities – but no specific increase in corporate or government bond buying or derivatives overlay. We anticipate this trend to continue with future ECB rates increases as clients seize on current market conditions to lock in higher rates.”
Demand for government bonds from corporate clients has largely remained stable, but persistently low, over the last couple of years, agrees Gillmann. “In the corporate bond market we have seen an increase in activity from corporate clients in an effort to secure increased short term yields for their available liquidity, beyond the returns from classical bank deposits,” he adds.
A simple approach remains the order of the day when it comes to currency hedging according to Eric Huttman, CEO at currency management solutions provider MillTechFX. He suggests that while some corporates moved towards more exotic products pre-pandemic, they now appear to be reverting back towards more straightforward linear products such as forwards – which are more liquid and easier for CFOs to unwind should the market move against them.
“For clients that purchase US dollars we have seen an increase in corporates moving towards simply leaving their exposures unhedged with the dollar’s extreme levels being seen – or perhaps it might be more accurate to say hoped – to be driven by factors that should ease with time,” says Michael Quinn, Group Trading Manager at foreign exchange specialist Monex Europe.
Conversely, for clients that have benefitted from recent moves there has been a noticeable uptick in appetite for hedging instruments. Companies that historically have not hedged and may have budgeted on rates of exchange far less favourable than the current market are now keen to lock in that balance sheet gain and reduce exposure to further volatility.
