APAC treasurers are finding new ways to make cash ‘count’

The post-pandemic environment presents significant challenges for corporate treasurers. Uncertainty, combined with uneven recoveries across the globe has led to higher cash balances than ever before; but as supply chain issues and supressed yields persist, corporates are increasingly looking to increase efficiencies, and where appropriate, expand their investible universe to benefit from a more diverse product set and higher potential yield.

Beyond the impact of Covid-19 and the challenges presented by the low yield environment, is the increased focus on cash management products that help treasurers to align their investment activities with their company’s wider sustainability objectives. The growing importance of environmental, social and governance (ESG) considerations in Asia is increasing, as is the demand for credible sustainable cash products with competitive yields.

These are some of the takeaways based on the views of 140 senior treasury professionals at leading local and multi-national corporations (MNCs) in the region, conducted in September 2021 by CorporateTreasurer in partnership with HSBC Asset Management.

Respondents by country

Respondents by type of organisation

Adapting to new treasury realities

For APAC treasurers, the pandemic has acted as a real life ‘stress test’. The ensuing lockdowns and associated disruption to cash flows led many to resort to overdraft or loan facilities to stay afloat, and the ongoing unpredictability of the economic environment has meant that traditional treasury activities have come back into focus for corporates – cash is once again ‘king’.

This is clear from the survey, where as many as 75% have either increased cash buffers or adopted a more conservative structure over the last 18 months.

For local corporates in particular, treasurers have adopted a more conservative structure over this period, in comparison with their peers at MNCs – who have prioritised increasing cash buffers – perhaps because their global footprint meant their structure was already conservative.

The main impact of Covid on cash and short-term positions

The need to protect and retain cash is also reflected by respondents’ most common treasury management strategy: using cash forecasting to plan for cash requirements. This correlates with one of the most trying periods that treasurers have experienced, and the importance of building additional cash buffers into the forecasting process to avoid solvency concerns in future.

The spotlight on short-term cash needs for the business is also apparent in it being by far the biggest driver that those treasurers who responded to the survey cited as likely to change the maturity of holdings in the next 12 months. This is more applicable to local corporates than MNCs, with respondents from the latter indicating that economic risks and recessionary fears would impact their decisions on maturity.

Most common treasury management strategy

Implementing investment policies to help successfully navigate the economic environment and ensure sufficient liquidity has proven to be of increasing importance to APAC treasurers. Already common in the US and Europe, the use of a treasury specific investment policy in Asia was less prevalent; however, the pandemic has served to reiterate the positive impact of this discipline to ensure consistent decision making throughout all market conditions, in particular to ensure liquidity is maintained.

The main driver to change the maturity of holdings in the next 12 months

Applying a new mindset to cash investing

Among the trends to emerge from the survey findings, there are four key considerations for treasurers at corporates across Asia Pacific as they map their liquidity strategies:

1. Treasurers should weigh up the benefits of external expertise – there is a tendency to closely control cash rather than seek outsourced solutions for short term investment needs.
2. Treasurers must avoid under-estimating liquidity risk – there is a need to manage liquidity risk in relation to liabilities, not just assets.
3. Treasurers should address misperceptions over yield and credibility with ESG investing – with sustainability playing a more central role in investment decisions, more due diligence is needed to assess differences between structures and their impact.
4. Treasurers must look beyond short-term strategies – markedly short investment horizons limit opportunities to implement new strategies such as ultra-short duration bond funds.

1. Exploring the possibilities from outsourcing cash investments

Notable from the survey is the significant majority of corporates in Asia Pacific that prefer to invest their cash in highly-accessible instruments – especially in bank and time deposits, which comprise nearly 60% of allocations.

“With such minimal investments in the markets, responses show a reluctance among corporate treasurers in Asia to outsource much of their cash investment needs,” said Jonathan Curry, global chief investment officer of liquidity at HSBC Asset Management.

% of short-term portfolios allocated to various investment instruments

On the one hand, this is to be expected, given entrenched relationships among many corporates with their banks, plus the typically cautious approach to cash investing.

At the same time, there are benefits from outsourcing to a professional third-party manager, explained Curry. These include: efficiencies through resourcing, such as the ability to invest cash simply and quickly; the diversification that becomes possible; and access to expertise to offer experience and understanding in terms of trends in credit, interest rates and broader market themes.

The ideal outcome is a blended approach, he added. “It shouldn’t be a one-size solution for a corporate treasurer. An outsourced solution can combine money on deposit at relationship banks with market investments.”

This has become more common in the US and Europe, said Curry, where the global financial crisis in 2008 accelerated the propensity to pursue this type of complementary investment strategy within treasury functions.

2. Paying more attention to liquidity risk with liabilities

The desire for easily accessible, short term investments is reflected by liquidity being the dominant objective among survey respondents, as this will always be a priority for corporate treasures, alongside security of capital. Whilst there is a want to optimise yields, particularly in a low rate environment, this would not be at the expense of credit quality of an investment.

Key objectives of cash investing

This focus on liquidity tallies with the relatively short average maturity for cash investments within the region’s corporate treasurers – around 60% across most of the countries surveyed have an average maturity of less than 60 days. In part, this is perhaps to help minimise interest rate exposure and opportunity cost of increased return as the economy recovers and market rates begin to rise.

Australia, however, bucks the trend, with more than half of respondents having an average maturity of 60-90 days for their cash investments. This is expected, as generally the top four Australian banks offer clients a spread over and above the Reserve Bank of Australia (RBA) cash rate for time deposits, which is more attractive than the interbank Bank Bill Swap Rates, which continue to track lower than the RBA rate.

Average maturity for cash investments

While these trends are in line with other survey findings, they raise a question about the approach treasurers are taking to liquidity risk management.

“Too often there is a focus on managing liquidity risk asymmetrically, whereas in reality it needs to be done symmetrically, with consideration of the liabilities as well as of the asset side,” said Curry.

In line with this, treasurers need to be aware of issues such as concentration risk and how these are controlled, as part of their liquidity risk management strategy. This should therefore be a key part of any due diligence a treasurer undertakes if outsourcing cash investments to a third party manager.

3. Having a clearer view on ESG impact

With the increasing focus from regulators, governments and individuals alike, companies can no longer ignore ESG. Fuelled by the pandemic, consumers are increasingly gravitating towards businesses with strong sustainable and socially responsible credentials. Business models and strategic priorities need to adopt more sustainable principles in order to minimise transition risks, increase resilience to shocks and promote long term growth.

This is reflected in the survey results, where sustainability is of growing interest to treasurers, both in the importance to the organisations generally, as well as the specific ESG agenda within their treasury function.

For more than 50% of respondents, primarily MNCs, sustainability is not a new phenomenon and has been important for several years, whilst for around 23% it has become increasingly more important over the last 12 to 18 months. This is perhaps because for the most part, corporates in Asia have not embedded these criteria in their activities to the same extent as their counterparts in EMEA or the Americas, instead being in the consideration stage on the impact of ESG across various areas.

This increase in focus in ESG, however, has not necessarily resulted in an ESG specific agenda at the treasury level.

Around a third of respondents don’t have an ESG agenda, although half of them say there is a plan to create one in the coming year. This suggests treasurers recognise the benefit of ESG frameworks for treasury to help deliver on their company’s wider sustainability objectives, as well as align to shareholder expectations, government policy and external regulation.

The importance of sustainability to the company

Although progress is being made, there is still scope for a lot more engagement. Although 41% of respondents have at least some of their cash currently in ESG investments – with nearly a quarter allocating over 5% of their portfolio – nearly 60% are yet to make a start on this journey.

Drivers of the ESG agenda within treasury management

Cash currently in ESG investments

Reasons to boost allocations to ESG investments over the next 12 months

However, to encourage a higher allocation to ESG investments over the next 12 months, treasurers want to see more credible investment options, as well as higher yields.

In part, this is an education piece. With the multitude of products that have either been newly launched or converted in the last 18 months, it’s important that treasurers are able to look under the bonnet and identify which options are ‘credible’ from an ESG perspective, and which are not.

“It is not enough for treasurers to generically be comfortable investing in a short-term investment product labelled as ‘sustainable’, such as a green deposit, or an ESG-focused money market fund,” said Curry. “Instead, they need to look at the structure to understand what it is delivering in line with its sustainability objectives.”

Getting clarity on such benefits and on the impact being created needs to become a key decision-making factor for treasurers in their bid to address any concerns or doubts over credibility.

“With some structures, there is a clear linkage between the funding provided and a sustainable objective that should promote change. For others, it is difficult to see the linkage,” he explained.

In terms of the yield dilemma, Curry said the difference between some ESG cash solutions compared with more traditional, non-ESG cash options is minimal.

“Some investors assume a short-term ESG-compliant solution will cost them in terms of yield, whereas the reality is it won’t,” he added. "The perception that adopting an ESG strategy leads to a sacrifice in return is relatively outdated.”

4. Hunting yield and stretching investment horizons

Although liquidity and capital preservation remain the primary objectives for treasury investments, yield optimisation – whilst usually the third most important – is becoming more significant  in this lower-for-longer yield environment.

From a strategic perspective, treasures are becoming more proactive in their utilisation of markets products to allocate their medium term and strategic cash, which was evident in the survey with almost a quarter of respondents using fixed income products and ultra-short duration bond funds as part of their investment mandate.

Ultra-short duration bond funds, in particular, are now being analysed more and more by treasurers, and included in the overall strategies of treasury centres. For medium term and strategic cash, there is more appetite to allocate to products that put the cash to work. This is evident in the survey where 46% of treasurers using ultra-short duration funds are comfortable with an average credit rating of BBB, with 6% favouring BBB- and some even lower.

Minimum credit quality required to give comfort to investors in an ultra-short duration bond fund

Ultimately, treasurers can tap into various options to adapt their short-term portfolio decisions if they are looking for a better chance to achieve their key goals from cash investing – including aligning cash allocations with evolving sustainability objectives.

Indeed, for those treasurers considering such moves and, in turn, outsourcing some of their investment decisions to an external provider via a segregated mandate compared with a pooled fund, respondents say the most important consideration is the track record of the asset manager.
Being able to diversify and meet higher yield targets will therefore require corporates to venture into a wider set of instruments, including those that require a longer investment horizon.

Key consideration for users of a segregated mandate instead of a pooled fund

Meanwhile, an interesting, and somewhat unexpected trend to emerge from the survey, is that for investments in an ultra-short duration bond fund, treasurers have extremely short time horizons. Whilst this strategy may be being implemented to minimise interest rate risk, treasurers should ensure that the duration of the fund and volatility profile is appropriate for the segment of cash they are investing, since there can be a wide variation in short duration strategies that can lead to a dispersion in client outcomes.

This is particularly evident in Australia, where nearly two-thirds of respondents say they prefer a horizon of less than a month.

More broadly, a larger proportion of MNCs than local corporates have a preferred horizon of more than 12 months, as well as at the other end of the spectrum, with more MNCs than local corporates opting for horizons of less than a month. By contrast, a much larger proportion of local corporates than MNCs prefer a horizon of between three and six months.

Preferred investment horizon in an ultra-short duration bond fund

However, with more than two-thirds of respondents generally opting for an investment horizon in an ultra-short duration bond fund of less than three months, many treasurers might find it a challenge to reap the benefits of such a solution.

“For an investor to consider re-allocating from a short-term deposit, or equivalent instrument, to an ultra-short duration strategy, we recommend a minimum horizon of six months,” said Curry.

This is due to the possibility of increased volatility in returns with these types of solutions, stemming from their longer duration and the introduction of a slightly higher credit risk. “An investor needs to allow a reasonable length of time to create a higher probability of getting a higher return, which is what is driving them to choose a higher risk solution in the first place.”

This article was produced with special contribution from Lauren Gibson, APAC Liquidity Investment Specialist, HSBC Asset Management

Disclaimer
The views expressed above are based on the survey results and held at the time of preparation. HSBC Global Asset Management (Hong Kong) Limited accepts no liability for the information provided or any failure to meet forecasts, projection or target.