About Me

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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Wednesday, 24 July 2013

Debunking the cash hoarding myth

January 2013

Despite non-stop media reports of corporates hoarding vast stockpiles of cash, the amount held by US corporates only increased slightly in 3Q12, while both European and UK corporates are decreasing the amount of cash they hold.

Over the past few years, many headline inches have being devoted to the extraordinary level of cash held by corporates, while the ensuing articles berated the corporates for refusing to nurture the green shoots of economic recovery by investing their cash for future growth.  But there is no evidence that corporate cash levels have ballooned in recent years, according to Treasury Strategies.

Analysing figures released by the US Federal Reserve, Office of National Statistics and European Central Bank, Treasury Strategies report that:
  • Although US corporate cash as of 30th September 2012 reached an unprecedented level of $1.73 trillion, it only increased by 2.5% on the previous quarter.  The pace of increase actually declined over the past 18-24 months relative to earlier in the past decade.
  • UK corporate cash as of 30th September 2012 was £0.69 trillion, a 4.5% decrease from the prior quarter.
  • EU corporate cash as of 30th June 2012 was €1.93 trillion, a 0.40% decrease from the prior quarter and at the same level as in 2010.
Interestingly, since 2000 UK corporate cash grew the fastest of all the regions, effectively tripling over the 12-year period.  However, it has now seen a decrease in three consecutive quarters, which may be a reversion to the mean.

“Taken together, the US and Eurozone data move pretty consistently with each other, which may be a good indicator of the actual global levels of cash.  The UK data, on the other hand, shows more volatility,” says Tony Carfang, Partner, Treasury Strategies, which he thinks may be a result of the more global nature of the London market.

When looking at the levels of corporate cash as a percentage of GDP per region, in 2000 US corporate cash was 10% of GDP, whereas in 2012 it had only increased by 1%.  “It has held flat at 11% for a few years now, which counters the notion in the press that US corporates are hoarding cash.  That is clearly not the case,” says Carfang.

Both Eurozone and UK corporate cash levels have experienced greater fluctuations.  In the Eurozone, corporate cash levels increased from 14% in 2000 to 21% in 2012, with the biggest jump in percentage taking place in 2009/10.   In the UK levels started at 26% in 2000, peaked a year ago at 52% a year ago and have since continued to decline.

The end of TAG

 

The 31st December 2012 expiration of the Transaction Account Guarantee (TAG) programme, which was unlimited Federal Deposit Insurance Corporation (FDIC) insurance on all corporate transaction deposits, is an important change in the US regulatory environment worth mentioning, according to Treasury Strategies.  In place since early 2009, it is estimated that between $1.2 trillion to $1.4 trillion moved into US commercial bank deposits in order to take advantage of this special insurance guarantee.

“This is the first major unwinding of a post-crisis remedy,” says Carfang.  “And it may provide some insight as to how things may unfold as these cures begin to be dismantled.”  Many predicted that when deposit insurance was scaled back from unlimited to $250,000, billions of dollars would flow out of banks and into other instruments, particularly money market funds (MMFs).

However, leading up to the expiration date, in 4Q12 the deposits at US banks actually increased by 4%.  “This may indicate that market players believe that the banks are healthy and they don’t need deposit insurance, which is a good sign,” says Carfang.  “Or it may indicate that corporate treasurers believe that this money is implicitly guaranteed by the government and it doesn’t really matter.”

Treasury Strategies saw an inflow of $140 billion into MMFs, but nowhere near the $1.4 trillion that the MMF industry lost when the bank guarantee went into place in 2009.   MMFs assets went up by 5.5%, treasury funds experienced a 7% increase and prime funds saw only a 3% increase.  “The message is still one of safety, but also a willingness to diversify out of the banking system,” says Carfang.

Treasury issues for 2013

 

Treasury Strategies surveyed its LinkedIn groups to identify the most serious issues for corporates in 2013.  Based on 316 responses, the top concerns are:
  1. Economic outlook /interest rate levels (37%).
  2. Regulation (28%).
  3. Currency/counterparty risk (17%).
  4. Availability of capital (16%).
  5. Other (2%).
“Everyone feels it is hard to get a handle on the economic outlook and it is not helped by the political environment – ie the fiscal cliff and Eurozone crisis,” says Monie Lindsey, Managing Director, Treasury Strategies.  “There is awareness that regulation will have an impact but for treasurers the impact is unknown.”

Interestingly, currency/counterparty risk came third.  Based on the conversations with clients, Lindsey believes that most corporates have addressed counterparty risk by putting in place policies, processes and technology to help manage and monitor it.  “While it is a critical piece and an issue for everyone, most treasurers feel that they have it under control,” she says.  “What they don’t feel like they have under control is the economy and new regulation.”

First published on www.treasurytoday.com

WEF’s global risks report launches new country rating system

January 2013

By their nature, global risks do not respect borders.  The world’s “hyper-connectedness” requires an increasing international response to tackle unpredictable global threats.  But the planning needs to start with collaboration among stakeholders from governments, business and civil society at a national level.

The World Economic Forum’s (WEF) Global Risks 2013 report highlights wealth gaps (severe income disparity) and unsustainable government debt (chronic fiscal imbalances) as the top two most prevalent risks, in a survey of over 1,000 experts and industry leaders.  Respondents rated rising greenhouse gas emissions as the third most likely global risk overall, while the failure of climate change adaptation is seen as the environmental risk with the most knock-on effects for the next decade.

John Drzik, CEO of Oliver Wyman Group, a part of Marsh & McLennan Companies, said: “Two storms – environmental and economic – are on a collision course.  If we don't allocate the resources needed to mitigate the rising risk from severe weather events, global prosperity for future generations could be threatened.  Political leaders, business leaders and scientists need to come together to manage these complex risks.”

The report describes 50 global risks and groups them into economic, environmental, geopolitical, societal and technological categories.  The evaluation of the 50 risks also focused on their linkages, given their interdependent nature.

The report analyses three major risk cases of concern globally:

1. Health and hubris
Huge strides forward in health have left the world dangerously complacent.  Rising resistance to antibiotics could push overburdened health systems to the brink, while a hyper-connected world allows pandemics to spread.
2. Economy and environment under stress
Urgent socioeconomic risks are derailing efforts to tackle climate change challenges.  Inherent cognitive biases make the international community reluctant to deal with such a long-term threat, despite recent extreme weather events.
3. Digital wildfires
From the printing press to the internet, it has always been hard to predict how new technologies might shape society.  While in many ways a force for good, the democratisation of information can also have volatile and unpredictable consequences.

Overall, the survey revealed a slightly more pessimistic outlook than in previous years.  At a press briefing in London, David Cole, Chief Risk Officer and Member of the Group Executive Committee, Swiss Re, said: “Compared to the 2012 results, respondents viewed global risks to be more chronic than acute, in the sense that they may not manifest themselves immediately but they recognise the interconnectedness of these risks, which can amplify the effects.  These are the same issues as in 2012, but now the likelihood and impact has increased.”

He added that recognising the level of complexity shouldn’t lead to the conclusion that nothing can be done to intervene.  “Our responsibility as leaders is to leverage awareness into action,” he said, adding the old adage that an ounce of prevention is worth a pound of cure.

Special Report: National Resilience to Global Risks

 

In a special report on national resilience, the Global Risks 2013 report laid the groundwork for a new country resilience rating, which would allow leaders to benchmark their progress.  It is based on the notion that no nation alone can prevent exogenous, global risks occurring, which makes national resilience a crucial first line of defence.

Within that context, Axel Lehmann, Chief Risk Officer, Zurich Insurance Group, argued that countries need to take more of a corporate approach to risk management: in the same way that risks don’t stop at the door of a company, they also don’t stop at national borders.  Corporates’ adoption of enterprise risk management (ERM) should be a beacon to national leaders.

Lee Howell, the editor of the report and Managing Director at WEF, proposed creating the role of country risk officer, similar to a chief risk officer.  The idea was first floated as early as the 2007 Global Risks report.  “The challenge is global risk is exogenous but manifests itself in a country context.  The question is how to build a national response – shocks will happen but it is about planning the recovery.  Governments should nominate a country risk officer from their cabinet who will have an overall view of a nation’s risk and can work internationally with others at that level,” he said.

The national resilience rating would enable such officers and other decision-makers to benchmark and track a nation’s level of resilience, understand the balance that needs to be struck between resilience and other goals, and identify areas that may require further investment.

However, even in the corporate world the role of a chief risk officer is not as yet universal, despite growing risk awareness.  Many are moving in that direction, according to Accenture’s 2011 Global Risk Management Study, which found that the chief risk officer owns risk management in almost half (45%) of the companies surveyed, up from only 33% in 2009.  A higher proportion of financial services and insurance firms have chief risk officers – 59% and 54%, respectively.

Encouragingly, the presence of chief risk officers is not limited only to large companies.  Indeed, higher percentages of companies with revenues of $500m to $1 billion (73%) have a CRO in place, compared with 63% of companies whose revenues exceed $5 billion.

X Factors from Nature

 

The final section of the Global Risks report looks at “wild card” risks.  Developed in partnership with the editors of Nature, a science journal, the chapter on “X Factors” looks beyond the landscape of 50 global risks to alert decision-makers to five emerging game-changers:
  1. Runaway climate change: Is it possible that we have already passed a point of no return and that earth’s atmosphere is tipping rapidly into an inhospitable state?
  2. Significant cognitive enhancement: Ethical dilemmas akin to doping in sports could start to extend into daily working life; an arms race in the neural ‘enhancement’ of combat troops could also ensue.
  3. Rogue deployment of geo-engineering: Technology is now being developed to manipulate the climate; a state or private individual could use it unilaterally.
  4. Costs of living longer: Medical advances are prolonging life, but long-term palliative care is expensive. Covering the costs associated with old age could be a struggle.
  5. Discovery of alien life: Proof of life’s existence elsewhere in the universe could have profound psychological implications for human belief systems.
Read the Global Risks 2013 report in full at http://www.weforum.org/globalrisks2013

First published on www.treasurytoday.com 

Monday, 22 July 2013

2012 in review: top treasury trends

December 2012

Risk management, benchmarking and web portals were hot topics in 2012, as gleaned from the most popular articles on the Treasury Today website throughout the year.
As we move into 2013, it is important to take stock of the previous 12 months. Needless to say, it has been a struggle to maintain a positive outlook as the global economy continues to limp along at a snail's pace. The Eurozone crisis remains unresolved, although the fear of an unplanned Greek exit – or Spain or Italy for that matter – seems to have receded. The threat of the US going over the fiscal cliff is on-going but there is still hope that a catastrophe will be averted. Most analysts are projecting a slow start to 2013, with a glimmer of recovery in the second half of the year.

2012 may be perceived as the year of banking scandals, from money laundering for Iranians, rogue trading, flogging sub-prime junk to clients, and manipulation of the London Interbank Offer Rate (LIBOR). The LIBOR scandal inflicted a mortal blow to the banking industry's reputation, and Barclays had to fork out $450m to UK and US authorities in the summer for its role in fixing the reference rate for $360 trillion in contracts worldwide. UBS has become the second bank to be forced to pay out – and its fine is more than triple that of Barclays at $1.5 billion. UBS was also hit with a £29.7m fine by the Financial Services Authority (FSA) for rogue trading activities.

Corporates have not had an easy ride of it either. The spectacular failure of Facebook's initial public offering (IPO) in May, which led to the company losing more than $50 billion in market value (40%) in 90 days, has made other corporates skittish about directly tapping the market for funds. More recently Hewlett-Packard (HP) also suffered a reputational hit when it revealed an $8.8 billion write-down after “serious accounting improprieties” were discovered at Autonomy, the British tech firm it acquired in 2011 for more than $10 billion.

In these turbulent times, it is not surprising that the most popular article in 2012 tackled the issue of risk management and treasury benchmarking. Centralisation, technology and regulations were also popular topics within the top ten most-read articles on the Treasury Today website this year.
  1. Fostering efficiency and managing risk.
  2. Cash and trade: a common sense convergence.
  3. SEPA: where are we now?
  4. A ‘centred' treasury: Uta Kemmerich-Keil, Merck.
  5. Shell: still leading the pack.
  6. Choosing the right FX relationship.
  7. An holistic approach to managing liquidity.
  8. Treasury in emerging markets: focus on Africa.
  9. Through the portal: MMFs and risk management.
  10. Euro break-up: stress test your treasury.

 

Risky business

Treasury Today's European Corporate Treasury Benchmarking Study 2011 found that although traditional risks such as foreign exchange (FX) and interest rate were key areas for respondents, other areas of risk focus emerged from the findings. These included a growing focus on enterprise risk for 13% of respondents, up from 2.9% in 2010, as well as a determination to reduce the risk of error in treasury information by eliminating spreadsheets from the treasury function.

In the article “Fostering efficiency and managing risk”, John Gibbons, Europe, Middle East and Africa, (EMEA) Regional Executive at J.P. Morgan Treasury Services, explained how risk and efficiency have never really strayed far from the treasurer's agenda – they have just become a lot more complex. “Clients' requirements for excellent service and flawless execution play strongly to the efficiency agenda. Errors cost time and money,” he said. “By definition, this demands efficient technical capabilities and a strong ethos with regard to risk management.”

The continued focus on risk and its implications for businesses is an integral part of decision-making in treasury. Almost all the articles in the top ten touched on risk management in some way. Surprisingly, however, the article on stress testing treasury in light of a Euro break-up only just made it into the top 10 reads for 2012, despite Citi's chief economist putting the likelihood of Greece leaving the euro within 18 months at 90%. Suzanne Barry, Head of Liquidity and Investments, GTS EMEA, Bank of America Merrill Lynch (BofA Merrill), said: “It is an important part of the management process to identify, analyse and manage risks in the company that are, in this case, presented by the external environment.”

Most, or all, treasurers will be asking these questions to a certain extent but some companies are tackling this exercise more enthusiastically than others. “Not everyone is doing this proactively, although in our opinion, stress testing should be part of the job description,” said John Clark, Principal Treasury Consultant and Product Manager at IT2 Treasury Solutions.

 

Benchmarking and best practice

When asked why treasurers should devote time to benchmarking activities, Gibbons said: “Every business unit needs the opportunity to understand how they are performing, versus a best-in-class benchmark. This helps to make sure that their aspirations are market-leading and that they know where they are headed going forward. That is simply a question of best practice.

“In terms of the benefits of benchmarking, I believe that it's not so much a question of how your organisation scores vis-√†-vis a competitor, but whether your company or department is asking the right questions of itself. If you have a group of treasurers that have become very actively involved in supply chain finance for example, and your treasury department is not doing that, you need to understand why. It's about making active choices.”

While participating in benchmarking studies is vitally important, examples of best practice is also very popular with Treasury Today's readership. This year two case studies from the coal-face of treasury made it into the top ten reads in 2012, both of which highlighted the increasing significance of centralisation. In her article, Uta Kemmerich-Keil, Executive VP, Head of Corporate Finance at Merck, outlines how Merck moved from a decentralised structure with globally independent local subsidiaries to a highly centralised structure where all risk management and core treasury tasks are performed at the company's headquarters in Darmstadt. “The more you centralise treasury risks, the better you can handle them. The same is true for cash management. There is a natural hedge potential with a more centralised structure and economies of scale. The same holds true for external financing,” she said.

Royal Dutch Shell's journey to centralisation is pretty much complete, as documented in the article “Shell: still leading the pack”. Shell's treasury is divided into two core parts. The first is treasury operations. Headed by Nick Wakefield, Vice President of Treasury Operations, it represents the bulk of Shell treasury, focusing on day-to-day funding and supporting the business. Capital market activities, credit rating agency interaction, and bond issuances all fall under the remit of its head, Cheryl Sunderland, Vice President of Financial Markets. Wakefield said: “We have centralised all our liquidity and FX to three treasury centres. The main ones are located in Singapore and London, but we also have one situated in Rio de Janeiro that handles regulated markets such as Brazil as well as Argentina. All our treasury centres operate on standard processes and are under common management.”

 

Through the portal

Technology is such a large part of treasury operations, and two of the top ten articles focused on portals – one from an FX perspective and the other from a money market fund (MMF) perspective.

Although many of the largest corporates have shunned portals in favour of voice trading, multi-bank FX portals are undoubtedly convenient because in order to determine the best price, corporates can simply log-on to the portal, see prices from a selection of liquidity providers, and achieve best execution. “The beauty of trading via a multi-bank portal is that many corporates aren't focused on making money from FX, it's simply a hedging tool which enables them to carry on as usual with their business,” according to Peter D'Amario, Consultant, Greenwich Associates. “They don't necessarily want all of the paraphernalia that comes with a proprietary platform, which is often more suited to financial institutions. So the multi-bank portal reduces administrative costs and reduces the potential for error.”

Similarly in the MMF environment, the acceptance of portals means that a corporate treasurer can buy all of their MMFs in one place. Even if the treasurer is only interested in using one fund, a portal can be useful because of its market discovery capability – a treasurer can look at what other funds are on the market, how they are performing and how big they are – with all documentation available from a single site. If the treasurer is doing due diligence, looking for new funds or for fund comparisons, they can do this from one platform instead of going to every site.

Interestingly, there is a trend towards convergence of short-term instruments and FX onto MMF portals in response to client demand for a single venue on which a full portfolio can be managed and where the reporting, compliance and transparency tools can be leveraged, according to Greg Fortuna, Global Head of State Street Fund Connect.

There is a shift towards integrating risk management capabilities into portal functionality that treasurers need to be aware of. The ability to establish investment exposure to market events in near real time is critical for investment decisions, as well as reporting.

 

Looking ahead

Risk management and efficiency gains through technology will remain on the treasurer's agenda well into 2013. Despite some optimism with regards to the second half of the year, we are still not in the clear. As a transaction banker recently said: “It's a bit like running a marathon. We have hit the 22nd mile wall, the euphoria is gone and the pain is excruciating. We now need to pull together and push through to the finish line.” Then it will be silver jackets and Mars bars all round.

First published on www.treasurytoday.com

As SEPA deadline looms, half of companies have not yet started project

January 2013

With just over a year to go until the migration from legacy payment instruments to single euro payments area (SEPA) instruments, the lack of corporate preparedness is worrying. Is there a silver lining to SEPA that corporates can tap into that will create a upsurge in adoption?
More than half (52%) of corporates in the single euro payments area (SEPA) have not yet started their SEPA project and almost a quarter of these have not even started to investigate the issue, according to a survey by EuroFinance, despite the looming deadline of 1st February 2014.  Of those who have already started their SEPA project, 8% are already behind schedule, illustrating the size of the challenge ahead.

The survey, which polled 273 finance and treasury professionals, identified seven stages to a SEPA project:
  1. Not started.
  2. Evaluating options/planning.
  3. Planning, teams and budgets in place.
  4. Project under way and behind schedule.
  5. Project under way and on schedule.
  6. Basic SEPA compliance achieved and no further action planned.
  7. Basic SEPA compliance achieved and now seeking further efficiency.
The picture may not be as bleak as it first seems.  Of the 52% that have not yet started implementing SEPA, only 23% have not done anything yet, while 56% are in the analysis and project-planning phase and the remaining 21% have already set-up and budgeted the project and are thus about to start implementation.

“Given that the analysis phase (e.g. what and where are all my systems that have account data, what file formats are currently being used, how do I obtain IBANs, what mandate-management solutions are in place or need to be procured?), which is the second of seven stages of readiness and is often the most complex part of the entire project, I would argue that only 12% are truly behind,” says Andrew Reid, Head of Trade and Cash Solutions EMEA at Deutsche Bank, which sponsored the survey.

“The reason for that may vary: maybe they only use credit transfers (no direct debits) in a few countries, have a fully SEPA-capable ERP system, or may simply be active only outside of the Eurozone or even the SEPA zone altogether,” he says.

SEPA confusion

However, it is worrying that 31% of corporate finance and treasury professionals within SEPA zone countries admit that they are still uncertain about what is required for their company to be SEPA compliant by February 2014.

Reasons cited for this include:
  • Receiving conflicting advice from different banks about the interpretation of European Payments Council (EPC) rules.
  • Uncertainty over when local payment formats will be replaced by SEPA formats and about periods of coexistence of the two formats.
  • Uncertainty about XML ISO 20222 data formats and rules affecting their implementation.
For those that unsure as to what is needed, Reid advises: “Talk to your bank(s) immediately to obtain preparation/migration advice.  At Deutsche Bank, besides offering numerous value-added services to minimise the effort required by corporates, we have also created ‘The Ultimate Guide to SEPA Migration’ to help corporates prepare and migrate in time.  However, despite all this, we want to emphasise again that not doing anything is not an option for any company.”

He believes that there is a real risk to a ‘wait and see’ approach.  “The risks are that banks may not be able to process the payments/direct debits from such a corporate, or may only be able to do so with manual intervention, causing delays and additional charges.  Thus, not doing anything is not an option for any company.  It is ‘five minutes to 12’ and the clock is ticking – every company should put in place a project team immediately.”

Against the notion that the deadline might be pushed back, Reid argues that there is no political will by European law makers to change Reg. 260/2012.  “In addition, it is important to understand that dates can't just ‘slip’ because they are based on existing law.  To postpone them would require changing Reg. 260, and changing a law is generally a rather lengthy and cumbersome process, which (even in case there was political will) would likely be quite challenging to accomplish in just 12 months.”

Basic compliance or something more?

The goal of SEPA is to improve the efficiency of cross-border euro payments and 28% of companies are currently planning to achieve this result.  Of the rest, the majority (72%) have either set no goals or are aiming for ‘basic compliance’, i.e. having no rejected payment instructions and associated charge back costs after February 2014.

This is a real missed opportunity, according to Reid.  “SEPA also offers a ‘sunny side’.  Benefits come in the form of harmonised file formats and payment/collection instruments, reduced float, easier access and growth into new markets, reduced differences in bank fees across Europe and reduced fees in higher-priced markets,” he explains.

However, as the low migration rates prove, for most corporates these benefits were not sufficient to offset the required implementation costs.  “Nevertheless, by using SEPA as a driver to facilitate centralisation of payments/collections (potentially even under an on-behalf-of structure), corporates that operate in many countries and/or through many legal entities can potentially generate substantial operational efficiencies,” says Reid.  “Other potential benefits of centralisation can include: better control and risk management due to the standardisation of bank interfaces; the optimisation and standardisation of internal processes; and improved visibility over and access to cash (in case of a reduction/centralisation of bank accounts).”

First published on www.treasurytoday.com

Bank of America Merrill Lynch sponsors 2013 Adam Smith Awards

December 2012

Bank of America Merrill Lynch (BofA Merrill) is proud to sponsor the sixth Treasury Today Adam Smith Awards.
Bank of America Merrill Lynch (BofA Merrill) has confirmed its sponsorship of the 2013 Treasury Today Adam Smith Awards.

Named after the founder of modern economics, these awards recognise excellence, innovation, creativity and outstanding insight. They aim to inspire thinking 'outside the box' and reward real business impact. Winning in one of the 13 categories is a respected endorsement of hard work, achievement and a mark of true treasury talent.

“Now in its sixth year, the Adam Smith Awards recognise professional treasurers finding clever and innovative ways to meet their company needs,” said Richard Parkinson, Managing Director at Treasury Today. “We are delighted to welcome BofA Merrill as our new sponsor and look forward to recognising the very best treasury professionals operating in today's uncertain economic environment.”

“We are proud to support the 2013 Treasury Today Adam Smith Awards as they share our ambition to recognise outstanding performance across the treasury industry,” said Carole Berndt, head of Global Transaction Services for Europe, the Middle East and Africa at BofA Merrill. “Over the past five years, these awards have grown to become a globally-recognised standard for excellence and we are delighted to be working with the Treasury Today team.”

First published on www.treasurytoday.com

Sluggish start to 2013, but global economy to pick up steam

December 2012

After a dip in the first quarter, the global economy will stabilise and begin a gradual recovery in the second half of 2013, predicts BofA Merrill Lynch Global Research.

A cloud of uncertainty is likely to overhang the global markets in 1Q13 through a painful and protracted resolution of the US fiscal cliff. However, global economic growth is expected to improve in the second half of the year, ultimately pushing the S&P 500 Index to 1600, a new all-time high, according to BofA Merrill Lynch Global Research in its 2013 Year Ahead market outlook.

BofA Merrill Lynch analysts expect the resolution of fiscal policy issues, another year of accommodative central bank actions and improving corporate profits to skew the macro and market risks to the upside. They believe that the year ahead could be “lucky 13” for cautious investors, as the beginning stages of a “great rotation” in the markets from bonds to equities create opportunities for cyclical and undervalued asset classes poised for recovery.

BofA Merrill Lynch Global Research outlined 10 macro calls on which it is basing its 2013 outlook:
  1. The global economy is expected to grow 3.2%, gradually improving through the year, led by China and the US. Resolution of the fiscal cliff in the US and successful negotiation of aid to Spain, combined with high liquidity and low commodity prices, should support a gradual improvement in global business and consumer spending through the year. By the end of 2013, growth is expected to rise to 2.5% in the US and 8% in China.
  2. Monetary easing may not be enough to offset fiscal contraction in the first part of the year. Fiscal austerity in Europe and in the US – the latter by as much as 2% of GDP – is likely to be a drag on growth. Analysts expect the Federal Reserve to implement another round of quantitative easing following “Operation Twist”.
  3. The US housing recovery builds momentum. US home prices are expected to rise another 3% in 2013, adding to the 5% gain in 2012.
  4. With support to Spain from the European Central Bank (ECB), the European economy should stabilise as the year progresses. Despite a series of episodic flare-ups of the on-going crisis in Europe, the big tail risk of a Eurozone breakup has likely passed.
  5. Against a backdrop of subdued growth in developed markets, GDP growth in emerging markets is expected to recover to 5.2%, led by the BRIC economies, particularly China. However, rising inflation could leave emerging market policymakers with little room to ease, particularly Turkey and central and eastern Europe.
  6. Global equities should be the best-performing asset class. Powerful policy support, reasonable valuations and receding tail risks should help make global equities the best performing asset class in 2013. The US, European and Asian equity markets could see gains of 10% to 16% next year, with the MSCI AWI reaching 370 and the S&P 500 Index reaching a new all-time high of 1600 by year-end.
  7. The US dollar and euro could rally on the global recovery and greater fiscal clarity, pushing the yen lower and emerging market currencies higher.
  8. High yield and emerging market bonds should outperform corporate credit. On the heels of record-low yields in 2012, US investment-grade corporate bonds are likely to offer scant returns of 1.6% in the year ahead, but high yield bonds could return up to 7.0% and emerging market bonds could return 10.1%.
  9. Government bond yields should rise modestly. G3 central banks are expected to maintain their zero-interest rate policies. Government bond yields in the US, UK and Germany are expected to rise modestly to 2.0%, 2.5% and 1.5%, respectively, translating into total returns for major government bond markets of roughly -3% to +2%.
  10. Gold could rise to $2,000 per ounce. Large-scale policy easing by the US Federal Reserve and ECB positions gold as a useful hedge against global macro and inflation risks.

The corporate “rotation trade”

Accommodative monetary policy has driven debt costs far below equity costs for many companies. Next year, according to BofA Merrill Lynch Global Research report “Global Credit Strategy Year Ahead”, companies around the globe will remain incentivised to use cheap debt to please shareholders.

With low interest rates and high levels of corporate cash, M&A activity is also expected to increase. The emerging markets will benefit most, particularly Russia which will see a disproportionate amount of M&As. US companies look like they are further into the releveraging cycle than their European or Asian counterparts. For example, US M&A volumes are significantly up from the 2009 lows and the jump has been much more than for either Europe or Asia.

First published on www.treasurytoday.com

Working capital: consistency is critical

December 2012

What’s the biggest issue when it comes to working capital? It’s consistency, according to Gavin Swindell, Managing Director at REL Consulting.

Working capital is a consequence of a series of processes relating to a company’s suppliers, customers and internal operational processes, and involves managing inventories, accounts receivable (AR) and payable (AP), and cash. These processes do not vary greatly from quarter-to-quarter or even year-to-year, ie the client and supplier base remain relatively constant. But if working capital results are inconsistent when the processes are fundamentally stable, then this indicates a lack of control or management.

Working capital inconsistency partly stems from the fact that companies’ attitude and approach towards working capital can swing wildly, says Swindell. “Most of the time, companies allow working capital to inflate while they focus on cost or service drivers. Then the pendulum swings back, driven by changes in the economy, business environment or the end of the fiscal year. Suddenly cash becomes the priority, and companies begin to squeeze working capital for all it’s worth, usually focusing on quick fixes rather than making changes that will result in sustained improvements. Eventually, the status quo returns and working capital retreats into the background simultaneously inflating again,” he says.

During the financial crisis between 2008 and 2010, Swindell observed that many companies took working capital more seriously because bank lending was reduced, but optimising internal processes was not as easy as they anticipated. As a result, today CFOs and treasurers tend to address the symptoms rather than the cause. “They want better cash flow forecasting,” explains Swindell, “which is in vogue. They say that they can’t predict their short-term cash needs. Obviously the operational spend on working capital is a big factor in those day-to-day cash demands. The fact that they want better cash forecasting tools implies that their working capital processes aren’t under control.”

This lack of consistency would clearly be unacceptable for most companies when managing costs and service, yet often it’s the standard operating procedure for working capital. “If companies truly want to achieve optimised global performance of the supply chain/service delivery model and the associated cost/service/cash equation, then a sustained, consistent and structured effort needs to be implemented to ensure functional alignment around the working capital policies in place and proper measurement of the relevant trade-offs,” he says.

Swindell believes that it will take top-level sponsorship to improve working capital because the discipline relies on a number of different business units that, in many respects, are judged on competing metrics. “For example, a purchasing department may be excellent in achieving a low price, but is it concerned about the terms it gives away or the quantity it needs to buy in order to achieve that price?” he asks. These terms may not suit other areas of the business. “It is a well-worn clich√©, but no individual board member has the power to make a substantial difference on working capital. The whole board and the CEO need to collectively get behind working capital and make it a company priority if they want to see an improvement.”

When trying to achieve better working capital, companies are hampered by the way they are organised in silos by function. “Working capital can’t be solved by taking a functional approach – you can’t just give a target to a manager of a certain department. It has to be a cross-functional project with a cross-functional working party or process redesign,” argues Swindell. “Working capital oils the wheels of the business: the better the wheels – which are the functions – work together the less oil, or working capital, you need. But businesses find it very difficult. In my view this is the ultimate test as to how well a business is actually running.” Unless a company can achieve cohesiveness and functional alignment, it will always struggle with what constitutes best practice.

Best practice tools and techniques must be employed to ensure a scientific approach drives these parameters. For large global companies, best practice can be gleaned from internal high performers. “Companies should do an internal benchmark, which looks at where they are performing best,” Swindell suggests. “If a business unit, which doesn’t believe it can improve, sees another unit achieving 10% - 30% better results, then it begins to ask the right questions.” Companies should also perform external benchmark studies by looking at sector peers. External benchmarks do not have to be limited in scope to an obvious competitor, but can be a known company which is held in high esteem.

First published on www.treasurytoday.com