Investing strategies in inflationary times
12 May 2022
In an Economist Impact webinar supported by Deutsche Bank, two corporate treasurers shared how inflationary pressures are affecting their investment strategies – and why the Covid-19 pandemic is still shaping cash policies. flow summarises the three key learning points
Managing large cash positions in a negative interest rate environment has been a challenging task for corporate treasurers for years now. Yet, with the outbreak of the Covid-19 pandemic in early 2020, finding the right balance between ensuring immediate access to liquidity and cash preservation has become even more complicated for finance departments.
Most recently, the picture has started to change. While companies are still in need of cash buffers, low or negative interest rates are no longer the main concern. Instead, high inflation, geopolitical risk and rising interest rates are now shaping global investment markets – which creates new challenges for cash preservation.
How are treasuries protecting their assets and refocusing liquidity in this climate of uncertainty? What instruments are they using to manage excess cash? And to what extent does the Covid-19 pandemic still reverberate in companies’ investment policies? These issues were discussed in a recent webinar titled “Investing strategies in inflationary times”, hosted by The Economist and supported by Deutsche Bank.
“Listening to our clients and sharing market feedback with them is a critical role banks play, particularly as the economic environment emerges from pandemic and deals with new conditions around accelerating inflation and new geopolitical uncertainties”, comments Johnny Grimes, Head of Liquidity Product and Transactional FX at Deutsche Bank Corporate Bank. “Therefore, we are very grateful to the participants for sharing their experiences and enabling others to learn from their practices.”
The webinar participants were
- Coralie Billmann, EMEA Director Treasury, Paypal
- Andrea Sottoriva, Group Treasurer and Finance Director, SITA
- Edward Court, Global Product Manager, Liquidity, Deutsche Bank; and
- Damian Glendinning, Principal, Treasury Matters (Moderator).
Three key takeaways from the webinar
1. Immediate access to liquidity remains a top priority
Cash is king – this concept is still the leading principle for many treasury departments when it comes to formulating investment strategies. “Our attention to liquidity has clearly increased since the beginning of the Covid-19 pandemic and this continues until today,” reported SITA’s Sottoriva during the webinar. The Belgian company acts as an IT provider for airlines and airports in 180 countries – one of the industries that were hit hardest by the virus crisis with total industry passenger revenues falling by 69% in 2020 compared to 2019.1
Even though the situation has improved substantially for the airline industry over the last couple of months, “our main attention still lies on ensuring immediate access to liquidity“, Sottoriva continued. This is because “we are living in a VUCA world – which means volatility, uncertainty, complexity and ambiguity – where extreme events are getting more and more frequent and forecasting has become almost impossible“, the treasurer explains referring for example to the war in Ukraine. While SITA’s treasury policy allows investments of up to two years, the funds need to be redeemed immediately if necessary. “The first question that my CFO asks is: ‘When do I get my money back?’.”
Immediate access to liquidity is not a SITA-specific requirement, as a poll question during the webinar showed: 50% of the participants said that the ability to sell assets is the biggest hurdle to using non-deposit investments (see Figure 1). This approach would allow for higher yields and therefore help cash preservation in inflationary times – in particular since “negative interest rates will still be around for quite a while in the euro area“, as Deutsche Bank’s Court said.
Figure 1: Poll question during the webinar
2. Performance pressure increases as yields are rising
At the same time, the changing market environment also increases performance pressure on corporate treasury departments. This was something Coralie Billmann, EMEA Director Treasury at Paypal reported during the webinar. “We often receive comments from different stakeholders who observe that yields are getting higher and therefore ask if we will generate more return,” she said.
On the flipside, as she points out, higher rates also mean that liquidating financial assets at market prices could be painful”. “Therefore, treasurers really need to understand the businesses’ liquidity needs for the next months and adjust investment strategies and horizons accordingly,” she added.
This also includes using instruments that will perform well in this environment. Paypal, for example, currently looks at floaters, Billmann shared with the audience: “These kinds of bonds are very attractive at the moment, as the coupon increases with the rates curve, it doesn’t have any duration risk as the maximum duration is three months and the mark to market is pretty limited especially if you invest in high-rated names,” she said. Moreover, she believes that it is important to diversify away from sovereign bonds and invest in “liquid corporate names as well as financial bonds”.
Other companies are following similar approaches, as Deutsche Bank’s Court reported: “Many of our clients are seeking better yield by looking further down the curve particularly in US dollars with longer maturities. At the same time, many companies are reverting to traditional instruments like money market funds, commercial papers, and repos.” In an uncertain environment, these would be the ‘Go to tools’ for many treasurers, he added, which was later underlined by the results of another poll question (see Figure 2).
Figure 2: Poll question during the webinar
3. Even if investment decisions are delegated, treasurers need to stay in control
A third key message that was repeatedly emphasised during the webinar was the fact that treasurers need to stay agile. “In uncertain times, we need to be flexible and react quickly to changing market conditions,” said SITA’s Sottoriva. “Treasurers are policemen for cash. When we lose control, we lose our job.”
Paypal’s Billmann confirmed that “agility is extremely important.” Both agreed that this also means that important investment decisions need to be retained inhouse. “Even if we use external asset managers, we need to make sure that we are the ones driving the process”, SITA’s Sottoriva said. “Delegating investment decisions to robo advisors is not an option.”
To learn more about how SITA and Paypal invest their excess cash and how they ensure agility when it comes to investment decisions, watch the entire webinar here:
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