Investment Priorities Through a Regulatory and Market Transition
by Jason Straker, Head of Client Portfolio Management, Global Liquidity EMEA, J.P. Morgan Asset Management
Every year, J.P. Morgan Asset Management (JPMAM) produces its Global Liquidity Investment PeerView report, an in-depth study based on an extensive survey of more than 400 liquidity investors globally. The report illustrates trends and behaviours amongst investors, and provides a valuable benchmark for investors to consider how they are managing liquidity and identify potential areas of focus. In this article, Jason Straker, Head of Client Portfolio Management, EMEA for J.P. Morgan Asset Management’s Global Liquidity Group discusses some of the key findings and the action points for treasurers.
A market in transition
2015 is a particularly interesting year in which to conduct the PeerView survey, given that significant regulatory developments are under way, combined with a challenging, but potentially changing interest rate environment. Banks in North America and Europe in particular are implementing Basel III, one of the outcomes of which is a declining appetite for non-operating deposits of less than three months’ duration. At the same time, money market fund (MMF) reforms have been finalised in the United States, and will take effect over the coming months. These reforms are forming a backdrop to discussions in Europe and other regions such as China on similar reforms. From an interest rate perspective, negative interest rates in Europe create specific challenges for euro investors, while investors in USD and to an extent GBP are anticipating an increase in rates.
2015 is a particularly interesting year in which to conduct the PeerView survey
This diverse combination of market and regulatory pressures is prompting investors to reconsider and potentially revise their investment approach. However, the PeerView results indicate that they are not responding in a negative or reactionary way to these changes. For example, many commentators have predicted that investors would reject MMFs as they shift from a constant net asset value (NAV) to a variable NAV. Sixty-three per cent of investors anticipate continuing with the same allocation of MMFs once the reforms take effect, while 20% expect to increase their allocation. In the United States, 70% of the respondents who are currently invested in a prime money market fund, expect to continue using this product once the forthcoming reforms have been implemented.
Pressure on asset allocation
While the use of MMFs looks likely to remain stable or even increase, the same cannot be said for operating deposits. Almost half of respondents noted that their banks were already encouraging them to move cash off their balance sheets, and this will become more widespread in the months ahead. The notable exception so far is in Asia, where this is not yet taking place. Banks in Asia are implementing Basel III at a slower pace than banks in North America and Europe, but banks globally will ultimately be subject to the same liquidity and capital adequacy requirements, so investors in Asia will need to consider alternatives to deposits as those in other regions are doing. In fact, the impact is likely to be greater as the use of deposits is more common in Asia: 57% of assets in Asia are held in deposits compared with 44% in Europe and 42% in the United States.