Cash & Liquidity Management

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Cash Management and Investment in a Shifting World Without a crystal ball, it is difficult to predict which path the economic recovery will take. How can treasurers take action to avoid uncertainty and ensure their cash management and investment strategies are fit-for-purpose in the new operating environment?

Cash Management and Investment in a Shifting World

Cash Management and Investment in a Shifting World

By Eleanor Hill, Editor


Without a crystal ball, it is difficult to predict which path the economic recovery will take. Many treasurers are therefore wondering how to manage and invest corporate cash in an optimal manner, given the uncertainty ahead. Nevertheless, Yera Hagopian, Managing Director, Liquidity Solutions, Barclays, and Daniela Eder, Head of Payments & Cash Management Europe, Barclays, believe that treasury teams can take action today to ensure their cash management and investment strategies are fit-for-purpose in the new operating environment.

 

Yera Hagopian

Yera Hagopian
Managing Director, Liquidity Solutions, Barclays

March 11, 2020, will go down in history as the day the World Health Organisation declared the Covid-19 outbreak to be a pandemic [1]. That same day, the Bank of England made an emergency interest rate cut, down from 0.75% to 0.25% [2] – and the UK government launched its Coronavirus Business Interruption Loan Scheme (CBILS). Eight days later, the UK interest rate was cut again, to an all-time low of 0.1%, and £200bn in quantitative easing (QE) was announced [3].

Similar stimulus packages were launched by central banks and governments across the globe. In the US, the Federal Reserve embraced near-zero rates and committed to $700bn worth of asset purchases [4]. The European Central Bank rolled out its €750bn package known as the pandemic emergency purchase programme (PEPP). Numerous employee furlough schemes were then added to the mix.

Meanwhile, corporates were busy taking matters into their own hands. Hagopian explains: “When the pandemic began in earnest, many companies’ immediate reaction was to have as much liquidity on hand as possible. Larger companies went to the capital markets, while smaller corporates could access government schemes – and some corporates opted for both of these avenues.”

Many organisations also drew down on their revolving credit facilities, in order to have cash available if they needed it, which was more of a psychological move than a tactical one. In addition, a large number of corporates pressed pause on material investments, making the stockpiling of cash even more pronounced.

Eder adds: “There was a significant knee-jerk reaction to the pandemic, with corporates drawing down huge amounts of cash – and then looking for places to park it [see fig.1]. Money poured into seemingly ‘safe’ investments such as government and Treasury money-market funds. Yet, by and large, these investments were made in ‘panic mode’ and often not necessarily with a profound assessment of the company’s treasury policy.”

 

Fig 1: Usage of Short-Term Investment Instruments?
Fig 1: Usage of short-term investment instruments?

Source: TMI and Barclays research report: ‘New Europe: Is Your Treasury Fit for the Challenge?’


The journey ahead

Dany Eder

Daniela Eder
Head of Payments & Cash Management Europe, Barclays

Now that the dust has started to settle, corporates are beginning to take a more measured approach to their cash and investment management again. Says Hagopian: “The billion dollar question for treasurers is: ‘what happens next to the economy – and what does this mean for my cash?’ But, in truth, no-one can accurately predict what the recovery will look like. There are so many unknown factors at play, not least the medical outcome. Additional waves of Covid-19 could mean further economic downturn, but if an effective vaccine is discovered, the opposite could be true.  The economic impact in the US is also a significant concern, as any negativity in the US economy inevitably has a global impact.”

What’s more, this is playing out against a backdrop of geopolitical uncertainty. Eder notes: “From Brexit and trade wars to the US election, the political landscape is constantly shifting. Geopolitical risk is therefore adding to the complexity of the situation and making it harder to ‘read’ the markets. As a result, treasurers have become very risk-averse – which is entirely understandable – and cash buffers have become de rigueur, as they were after the financial crisis of 2008.”

Given the aversion to risk, it is likely that corporates will want to conserve their cash for as long as possible. Nevertheless, Hagopian cautions that government support schemes will come to an end sooner or later. “In the UK, the government is already signalling the end of the employee furlough scheme and companies need to prepare for that. Moreover, some of the financial support options that corporates chose in haste during the ‘March frenzy’ have strings attached to them. On reflection, it may be considered prudent to start repaying those, in particular if they are expensive, or have covenants or conditions attached which may be limiting in the future,” she says.

 

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