Key market trends impacting treasurers
Corporate treasurers are facing another complex market environment this year. The pandemic has created significant economic uncertainties, which have been compounded by geopolitical tensions, supply chain disruptions, and changing regulatory regimes, resulting in a high inflation. In this article, we will explore some of the key market trends that are likely to impact corporate treasurers in the coming years.
In 2022, according to Reuters, major central banks hiked rates at the fastest pace (and by the largest amount) in more than 20 years. The U.S. Federal Reserve hiked 7 times totalling 425 bps for the year while the Bank of England (BoE) hiked 350 bps across 9 hikes and the European Central Bank (ECB) hike 250 bps across 4 consecutive hikes. 2023 has also seen already several hikes, and the year is far from over!
All of this in order to fight against inflation.
"One might wonder whether the end justifies the means"
However, with recent news, one might wonder whether the end justifies the means…We are all glad that the financial system is much more resilient compared to 2008 financial crisis, after the numerous reforms banks had to go under, allowing them to have high levels of capital today to pass the ongoing storms with a shaky banking environment and market turmoil. In my view, what is going on is a good (and necessary) refreshing cure that yes, banks can still go bust… and counterparty risk is still all around us.
"A good (and necessary) refreshing cure"
As the cheap/zero-cost money came to a brutal end after more than a decade of free money, corporate treasurers have (again) to adapt to this new situation. The current environment results in tighter debt market, with also foreign exchange hedging getting more expensive. The recession risk, together with uncertainty puts higher focus on cash forecasting (like if it wasn’t already priority #1…) For companies not too much leveraged (i.e. not too reliant on debt to fund their activities) this shock can be absorbed, while SMEs struggle with inflation and stricter access to funding combined with higher borrowing costs.
"High interest rates are not only a consequence of rate hikes by the central banks to fight inflation"
Treasurers need a much more active management of cash, both on the borrowing side and the investment side. As a result, Money Market Funds providers are getting a lot more attention, and requests for short-term deposits are increasing all over the place. The duration of investments has changed as well (impacted by the speed of rate hikes, and the uncertainty). However, there’s no free lunch: high interest rates are not only a consequence of rate hikes by the central banks to fight inflation. Pointing on the horizon are also coming higher counterparty risk and, maybe, liquidity shortage. Therefore, treasurers will need to find the right balance, with a risk-adjusted return on their excess cash vs simply benefiting from almost “risk-free” returns.
"Expect volatility to persist in the short term"
In conclusion, Corporate treasurers need to consider implementing and updating their hedging strategies to mitigate the impact of currency fluctuations, closely monitor interest rates and counterparty risk to ensure that they are managing their cash and debt portfolios effectively, and in good household manner, so that they can position their companies for success in the coming years. They will need to stay vigilant and adapt to changing market conditions, and expect volatility to persist in the short term.