Even in the early days of the COVID-19 crisis, companies were holding their short-term investments in banks due to concerns over the economy, according to the 2020 AFP Liquidity Survey, underwritten by Invesco.

Background

The 15^th AFP Liquidity Survey was conducted in March 2020 and gathered responses from 375 treasury and finance professionals. During that time, the COVID-19 virus was just beginning to impact the United States and panic had not fully set in.

However, financial leaders were already concerned about a probable recession in the U.S.—despite spite historically low unemployment figures during the previous 12 months and a strong stock market. The U.S. Federal Reserve had lowered interest rates too, signaling reasons to be cautious. Treasury and finance professionals were dealing with the unknown and needed to rely on their experience from the previous financial crisis in order to manage in a unique environment. It is probable that any progress made over the years with organizations looking to optimize liquidity with their investments, will be rebuilt in the next couple of years. Organizations are likely to take extremely conservative postures with their investments.

Managing liquidity is going to be key for treasury and finance professionals throughout the rest of 2020 and further. Creating a liquidity buffer will be essential, as there is tremendous uncertainty regarding when there will be a return to any semblance of normalcy.  

BANK DEPOSITS

Fully 51% of respondents revealed that they increased their short-term investments in banks. This is the highest percentage in three years, up from 46% in 2019 and 49% in 2018 and a reversal of a downward trend that began in 2015. Although the survey was taken before the full panic over the COVID-19 outbreak had set in, this flight to caution likely reflects concerns that pandemic poses a critical threat to the global economy.

As the crisis surrounding the pandemic unfolds, organizations will need to have great trust in their banking partners as they maintain their liquidity in these institutions. Therefore, it comes as no surprise that 93% of respondents consider the overall relationship with their banks to be the primary driver in bank selection. However, 73% indicated that the credit quality of a bank is also a deciding factor, indicating that they are prudent when looking at the long term.

“Bank deposits saw an increase for the first time in five years, and that’s not a coincidence,” said AFP president and chief executive officer, Jim Kaitz. “Although we performed this survey in the early days of the pandemic, financial professionals could see the gathering storm. With companies needing more access to liquidity and drawing down on credit facilities, their relationships with their banks will become more important than ever.”

SAFETY AND LIQUIDITY

Organizations are continuously working to balance their desire for safety and liquidity against a competitive rate of return. Safety continues to be the most-valued short-term investment objective for 62% of organizations, slightly lower than the 64% reported last year. Even though unemployment numbers were at all-time lows, the stock market was on an upward trend and financial professionals were gaining confidence in the economy when this survey was conducted, organizations still chose safety over liquidity.

Perhaps the small decline in the share citing safety as the most important objective can be attributed to an uptick in liquidity, allowing for access to funding where and when a firm needs it. Note that these shares of respondents citing safety as their organization’s primary investment objective are significantly lower than the 84% of financial professionals that cited safety in 2009 after the recession in 2008. Whether a vast majority of companies will opt for safety in the wake of the severe economic crisis caused by the COVID-19 pandemic this year is unclear. We do know, however, that the two crises are different—one was credit driven while the other was liquidity driven.

Thirty-four percent of survey respondents indicate their organizations’ most important objective is liquidity—slightly higher than the 33% reported in 2019 and the 31% in 2018. In fact, it is the largest share of survey respondents citing liquidity as the primary investment objective since 2008 when AFP began tracking this data.

As safety and liquidity remain the primary objectives for organizations, yield continues to be a distant third. This year’s results reveal that 4% of survey respondents cite yield as the most important investment objective for their organizations, slightly higher than the 3% reported in 2019. We can expect in next year’s survey data we might see the percentage of financial professionals citing yield as important drop below the current 4%.

“As a global provider of cash solutions, we have successfully navigated the recent environment through our longstanding strategy that considers safety and liquidity in tandem with (or alongside) yield,” said Laurie Brignac, CIO and Head of Global Liquidity, Invesco. “The heightened importance of reliable practices and planning in uncertain environments is consistent with the findings in this annual survey, and we see that borne out with the consideration of cash segmentation strategies with many of our global clients both in the U.S. and abroad.”

INVESTMENT POLICIES

Seventy-one percent of organizations have a written investment policy that dictates their short-term investment strategy. This is nine percentage points lower than the figure reported in last year’s survey, but well in line with results reported in surveys conducted in 2015, 2016 and 2017. A vast majority of larger companies (with annual revenue of at least $1 billion) and those that are net investors, investment grade and publicly owned are more likely have written investment policies than are other companies, although the percentage of these organizations with written policies is also lower compared to last year.  

Although it was a little surprising to see a decline in the number of companies with written investment policies, we can likely expect companies to prioritize this area more as the pandemic continues.

OFFSHORE CASH

Sixty-nine percent of organizations hold some amount of cash outside of the U.S.—higher than the 63% reported last year. The share increases to 79% for publicly owned organizations: 36% of these companies hold at least half their cash outside the U.S. Sixty-nine percent of large organizations—those with at least $1 billion in annual revenue—hold cash outside the U.S. compared to 59% of firms with annual revenue less than $1 billion that do so. These findings suggest that larger and publicly owned organizations are more likely to invest outside the U.S. than are others.

The majority of cash and short-term investments held outside the U.S. is in U.S. dollars (52%) and bank products, mirroring a domestic approach to investing. Euros are the second-most popular currency held by organizations outside the U.S. (25%), followed by the Canadian dollar (24%).   

LIQUIDITY WILL BE PARAMOUNT

As the COVID-19 pandemic continues to wreak havoc, liquidity planning at organizations will continue to be a key focus—definitely for the second and third quarters of 2020 and most likely through the end of the calendar year. Companies need to remain a going concern, and treasury departments are on the front lines when it comes to protecting their organizations. Treasury and finance professionals will have to maintain a liquidity buffer and ensure they have a seat at the table with their company’s CFO, as they did during the financial crisis.

For more information about the survey, please visit www.afponline.org/liquidity. View the interactive findings here.