Managing corporate cash in challenging times______

Ed Lopez, Chief Revenue Officer

The surge in inflation, uncertainty over policy rates and volatile markets have all made cash management and forecasting a lot tougher. When times are changing, treasurers need to change too writes Calastone’s chief revenue officer Ed Lopez

There is little doubt that corporate cash management is suddenly more difficult. For corporate treasurers volatility in financial markets is the enemy, threatening cash preservation and prudent management – and today we have a lot of volatility. Interest rates are rising and difficult to forecast, inflation is at levels not seen in decades, asset prices are unstable and behind much of this volatility is the crisis caused by Russia’s war in Ukraine. To explore the dynamics of the present situation I joined Richard Hallett, head of money markets at Aviva Investors, and Patrick Kunz, managing director at Pecunia Treasury & Finance, in a discussion hosted by Treasury Management International (TMI).

We began with our assessment of the root causes of the current volatility in financial markets. For Richard Hallett of Aviva it comes down to the simple economics of excess demand over supply. “As we came out of the pandemic we saw demand pick up quite quickly and there was pent-up spending at a time when the pandemic was still having long-term effects on the supply side,” he said. “Initially the central bankers thought that supply would quickly catch up with demand and inflation would be transitory. Now we know it is not and we have the additional factor of an energy crisis. So we see interest rates continuing to rise at least into Q2 or possibly Q3 next year.”

According to respondents to the Global Liquidity Survey that we recently carried out in collaboration with TMI, rates, inflation and geopolitical conflict are the most concerning issues for corporate treasurers. So the question now is, how are treasurers changing their short-term investment stance and are they looking beyond traditional short-term investment vehicles to increase their yield?

Patrick Kunz of Pecunia Treasury said he believed that increasingly treasurers will have to look for higher-yielding vehicles for corporate cash, even though that may take them out of their comfort zone. “Treasurers are very risk averse animals,” he said. “Protecting our cash is number one and number two and number three. Risk is always more important than yield – but having said that, once we have protected our treasure chest and we’re comfortable with our cash position, of course we can look at the yield.”

If you have a big pile of cash, it’s important to know how much inflation will hurt the company. So some treasurers will shorten their investment durations to protect their cash in the event of an inflation or interest rate shock.

Yet the short-term investment options for corporate treasurers are limited. Where will they turn to protect value in an inflationary environment? Richard Hallett of Aviva thinks that we will see a lot more interest in short-duration bond funds. He said, “If you have strategic cash rather than operating cash, cash that is going to be around for a little while, then you will want to add some incremental yield over and above what you would get in a normal money market fund.”

From the Calastone perspective, one thing that would help fund managers and treasurers in this uncertain environment is the ability to consolidate fund information from multiple sources. To be able to access information with a single click and act on it – without having to log into multiple systems – helps all parties make quick, informed decisions during market volatility.

One of the technologies that many see as having great potential for improving the efficiency of financial transactions – including treasury operations – is blockchain, widely known for its association with cryptocurrencies. So we discussed whether the volatility that has also disrupted the cryptocurrency space in recent weeks has not dampened the enthusiasm of mainstream adopters of blockchain as a financial technology.

Patrick Kunzcautioned that treasurers are still on the sidelines when it comes to embracing digital assets. “Maybe some of them are very ready for it, but it is still at the far end of the spectrum of risks,” he said. “If I am the treasurer of a large company trading in cryptocurrencies I have to tell my shareholders that they are now indirectly investing in crypto. I’m not sure there is a treasurer of a big company who is ready to do that.” Richard Hallett was more sceptical still, saying, “You have to remember that crypto is not so much a currency as a belief system!”

Richard and Patrick summed up their views of the current state of play from the treasurer perspective and how treasurers should position themselves for further volatility:

“If you have short-term cash, stay with money market funds, so you can get your money back whenever you want it,” said Richard Hallett. “For more strategic cash, think about short-term bond funds, short-duration funds, for as long as we see inflation as high as it is.”

Patrick Kunz agreed, adding, “In this situation there’s always this struggle between risk, reward and uncertainty for any treasurer making an investment decision. You always have to ask, what is more important? Is it risk? Is it yield? Or is it even about showing the world how green you are? And can you do all three? I’m not sure you can.”

Perhaps that’s the subject for our next discussion. If readers want to know more then we invite you to look at our discussion of the latest regulatory developments that will shape the treasury world here.

Ed Lopez, President, Global Money Market Services


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