by Neil Hutchison, Executive Director, J.P. Morgan Asset Management
2016 will be remembered for many reasons, but from a corporate perspective one of this year’s headlines is that corporate cash holdings have increased once again. Moody’s reported in May 2016 that cash holdings amongst US corporations alone had reached $1.7tr, $1.2tr of which is held outside the United States. However, this is a global phenomenon, affecting treasurers of companies headquartered around the world. Higher cash levels make it more difficult for treasurers to find appropriate repositories for cash that meet the company’s investment criteria, on top of the ongoing challenges of low or negative interest rates and significant regulatory change. In this environment, an investment choice that is growing in popularity is step-out investment strategies, allowing treasurers to seek greater returns and diversification on portions of their cash.
Challenging investment conditions
It is not only unprecedented corporate cash levels that should be prompting a re-evaluation of cash investment strategy. Most investors have become accustomed to low and negative interest rates in G10 currencies such as the euro, so sterling was a ‘safe haven’ for many. However, the result of the Brexit referendum has also seen sterling rates pushed down from 0.5 to 0.25%. While we are less likely to see sterling hit negative territory compared with the euro, it is now expected that rates could fall further to 0.15 or 0.1%. For investors in money market funds, this means that once returns on cash are calculated net of fees, they will effectively reach zero. Another consideration is the impact of regulatory change. For example, changes to rules on money market funds in the United States are already resulting in an exodus of cash from prime to government money market funds, but one of the outcomes of this is that credit spreads are widening, creating opportunities for investors.