With 2020 coming into view, the landscape for multi-national corporates (“MNCs”) is at an inflection point. Across a broad range of sectors, MNCs are grappling with divergent economic growth rates across their core markets, rising cross-border trade frictions and persistent risks of geopolitical and regulatory fragmentation.
In parallel, corporates across a range of consumer-facing sectors continue to wrestle with a rapid evolution in consumer expectations, embracing digitalization and disruption by ‘digital-born’ players. This has driven a cycle of M&A and spin-off activity as incumbents seek to sharpen their strategies and reinvent their business models in a changing landscape1.
With treasurers sitting at the nexus of cash management and liquidity, achieving an optimal treasury strategy and operating model is more critical than ever. Key trends impacting MNC treasury present a robust case for greater visibility and control in the face of headwinds and re-positioning treasury to capture emerging opportunities in a fast-evolving landscape.
Following the Fed’s rate cut in July, the outlook of interest rates and benchmark yields has been supportive of USD bond issuance. Similarly, market participants expect the ECB to maintain a dovish policy as it tries to support growth and inflation dynamics. On closer examination, we see some headwinds that may impact liquidity and the availability of credit in the medium term.
For European corporates in particular, ongoing restructuring in the European banking sector and macro growth challenges may present additional headwinds for lending appetite – against a backdrop where bank loans and credit lines have traditionally been the predominant channel for corporate borrowing.2Taken together, this suggests an emerging competitive advantage for corporates that can tap into capital markets and / or are able to self-fund through the business cycle.
Under these conditions, the case for achieving greater visibility and control of cash pools grows stronger. With liquidity in tighter supply, treasurers should take the lead in efficiently matching working capital needs across subsidiaries, self-funding capital investments and enhancing returns on surplus cash.
Exposure to foreign exchange (“FX”) is built into the daily operations of MNCs, and has proportionally increased in importance as they expand cross-border supply chains and seek growth in new markets. Consequently, robust management of the corporate’s multi-currency exposures is core to the treasurer’s agenda.
The current state of play in FX presents an interesting paradox. While headline FX volatility has declined across G4 currencies since the start of 20193, currency movements appear susceptible to “binary” or event risks. From a market structure perspective, markets have also seen a structural decline in liquidity4, setting the stage for sharp movements in reaction to “underpriced” market events.
Looking across to emerging markets, FX volatility is exposed to a number of high impact variables that remain highly uncertain. These include the path of U.S. interest rates beyond 2019, the outcome of U.S.-China trade tensions as well as country-specific and idiosyncratic risks such as Brexit.
In such an unpredictable environment, the task of multi-currency management becomes more important and more challenging for treasurers. This, in turn, requires greater visibility of the corporate’s currency exposures and a more disciplined approach to managing liquidity across multiple markets and subsidiaries.
De-globalization and cross-border fragmentation have emerged as dominant themes since the second half of 2016. While the outlook remains uncertain, the headwinds generated have already filtered into the global corporate landscape.
Driven by Brexit concerns, a number of MNCs operating across the UK and the EU-27 accelerated their contingency plans in 2018 - 2019, including but not limited to operational and legal entity transitions. For corporate treasurers, changes to the corporate structure and operating environment are likely to materially influence treasury optimization plans and target states.
Taking a broader view, “de-globalization” can also be observed in the escalating trade tensions between the U.S. and China (with spill-over risks rising for the US and Europe). Beyond the immediate headwinds to global supply chains, attention is also growing on the implications to investment flows and cross-border M&A in an increasingly protectionist environment.
Against this backdrop, MNC treasurers should examine how centralization initiatives should be implemented within an increasingly complex and more volatile cross-border environment. This, in turn, will have implications on target operating models, legal entity strategies and the choice of banking and service providers.
The evolution of consumer behavior and rapid embrace of digital channels in the world’s largest consumer markets has already transformed a number of industries – including retail, transport, hospitality and financial services.
Broadly, digitalization is driving two key shifts of relevance to MNCs. First, “legacy” companies are contending with the emergence of “digital-born” disruptors that have brought new business models to the mainstream, including “peer-to-peer” and “marketplaces” in a broad range of industries – posing a direct challenge to vertically-integrated and asset-heavy models.
Companies have responded by investing in new digital channels and experiences and engaging in M&A activity. In the hospitality sector, we have already seen examples of hotel operators acquiring or setting up “home sharing” platforms. In the automotive sector, manufacturers have increased investments in mobility start-ups and established direct-to-consumer channels. The Boston Consulting Group has estimated the global value of digital M&A deals at ~$658 billion in 2017, representing a quarter of the M&A market by value and 21% annualized growth since 2014.5
The second shift is more subtle but equally transformational. As corporates get closer to their end-customers, they are faced with a rising bar of expectations. In the age of “one-click / one-day” delivery, companies that fall behind in providing seamless experiences are likely to find themselves at a competitive disadvantage.
Taken together, the pivot from B2B to B2C models has material implications on the company’s payments and treasury infrastructure, as treasury moves from “one-to-few” to “one-to-many” counterparties and the imperative for investing in customer experiences becomes more apparent.
The scale and scope of change in operating environment calls for a thoughtful approach to treasury optimization – which should aim to mitigate uncertainties while also setting the stage to capture emerging opportunities. These include:
Future articles in the “New Treasury” series will spotlight the above themes in greater detail, showcasing our views on treasury best-practices, selected case studies and new treasury solutions that we believe will help add value for our clients as they embark on their multi-year transformation journeys.
To learn more, please contact your J.P. Morgan Treasury Services representative.
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Bain & Company. “Using M&A to Ride the Tide of Disruption” Jan 2019. URL: <https://www.bain.com/insights/M-and-A-in-disruption-2018-in-review>
European Commission. Analysis of European Corporate Bond Markets. November 2017 URL: <http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetailDoc&id=35768&no=1>
Bloomberg. “Errie Calm in FX Leaves Market Vulnerable in More Volatile World”. May 2019. URL: <https://www.bloomberg.com/news/articles/2019-05-08/currency-strategists-see-plethora-of-reasons-for-low-volatility>
Reuters. “Liquidity tops FX market concerns in 2019”. January 2019. URL: <https://uk.reuters.com/article/uk-jpmorgan-survey/liquidity-tops-fx-market-concerns-in-2019-survey-idUKKCN1PN167>
Boston Consulting Group. Cracking the code of Digital M&A (Feb 2019). URL: <https://www.bcg.com/en-gb/publications/2019/cracking-code-digital-m-and-a.aspx>