Uncertainty results in cash hoarding by US treasurers

The Association for Financial Professionals' (AFP) corporate cash indicators (CCI) survey for Q2 2017 has revealed a drop in optimism about the US economy among treasurers. The result was a turnaround from the previous quarter, when treasurers had been planning to invest in 2017.

In some regards, holding on to cash is the continuation of an existing trend. 

Mark Smith, head of global liquidity in global transaction services at Bank of America Merrill Lynch (BAML), says corporates have long been building up substantial balance sheets. Smith says this, in turn, has created solid credit ratings, which companies are reluctant to risk through spending and drawing down cash reserves. The AFP survey found 41% of respondents held larger cash and short-term investment balances at the end of the first quarter of 2017 than at the end of 2016. Further, 39% reported having greater balances than they had at the end of the first quarter of 2016.

The outlook for the coming three months is one of continued caution, with 26% of organizations anticipating expanding their balances.

There are, however, other factors at play than simply continuing to build up balance sheets. At the start of the year, the AFP stated that the rise in optimism was likely down to the promises of the Trump administration to push forward growth through corporate tax reform, increased infrastructure spending and a roll-back of regulations.

Jim Kaitz, president and CEO at AFP, says treasurers have changed their viewpoint after seeing what has actually happened.

“It is now obvious that in the first hundred days nothing substantial was accomplished along the three growth initiatives,” he says. “So in April when the CCI survey went into the field, there was a decided lack of optimism, hence the pullback from deploying corporate cash. 

"And let us not forget the tremendous amount of geopolitical risk and uncertainty out there.”

Michael Fossaceca, North American head of treasury and trade solutions at Citi, says there is a variety of different factors causing treasurers to hold cash. As well as the geopolitical landscape, he cites changes to the economy, with strong growth across tech industries.

“According to an estimate by Moody’s, Apple’s $250 billion cash reserves were 14% of the overall cash reserves of the non-financial sector,” he notes. “Given the accelerating growth in the technology sector, tech firms are simply generating a lot more cash than they need to invest.”

Fossaceca argues there are also expectations of increased M&A activity over the coming year, if the US government goes ahead with long-mooted changes to the tax code that could encourage US companies to repatriate overseas cash reserves, further swelling balance sheets.

However, BAML’s Smith notes that this might take longer than had first been thought. 

“The optimism we saw in the Q4 survey was probably linked to more positive prospects for cash held overseas,” he says. “It’s clear now that there’s significant uncertainty over the timing of legislation regarding repatriation, and that the ability to deploy overseas cash domestically may not be possible until 2018.”

Smith argues that the political complexity associated with the new administration’s tax proposals has become more apparent, adding: “As a result, corporates and their treasurers are likely to be less bullish on tax reform now than they were in the immediate aftermath of the [November 2016 presidential] election.”

All of this means treasurers are too concerned to risk making drastic changes to their current strategy. 

“As the CCI survey results showed, the outlook for this current quarter is that they’re going to remain sitting on their hands until things clear up on the legislative front,” says AFP's Kaitz. “They plan to continue to accumulate corporate cash, and the geopolitical situation around the world is nothing but terrifying to say the least. 

"And until things start to visibly change on both fronts, one should expect much of the same.”

Smith is largely in agreement, saying: “I’d expect more of the same for the rest of the year, certainly at least until there’s more clarity on how legislation, in the form of tax reform or infrastructure spending bills, for example, will support economic growth.”

For those looking for yield, but are reluctant to part with their cash, there are some options available. 

Says Kaitz: “With interest rates increasing modestly at the short end of the yield curve, corporates are able to get a slightly more respectable return on their short-term investments, whether they are bank deposits or money market funds.

“Some organizations have moved back into prime funds, although not that many. And some have taken it upon themselves to invest directly in short-term high-quality corporate paper.” 

Smith adds: “Despite prime fund reform, treasurers still have options for yield on their cash beyond government funds. Higher short-term rates, for instance, are causing treasurers to re-examine alternative short-term investments such as commercial paper and variable rate demand note, in order to generate higher-interest income.”

For others, the main source of revenue might well come from working out more efficient methods of running their business. 

Says Citi's Fossaceca: “Rising US interest rates also create positive momentum for corporations and institutions, and we think it creates a virtuous cycle for operating efficiency. 

"For example, as credit and external funding becomes more expensive, corporations will start to increasingly look inwards for sources of funding. That, in turn, will lead to more cash generation via working capital optimization for many industries and sectors.” ,