With Cash, US and Canadian Corporates Playing it Safe

According to the most recent Association for Financial Professionals Corporate Cash Indicators
(AFP CCI), the AFP’s quarterly study that surveys whether US corporate practitioners
are investing their organization’s cash holdings, businesses are once again
accumulating more cash.

Fully 38% of organisations held larger cash and
short-term at the end of the second quarter of this year than they did at the end of Q1,
while 26% had shed cash in Q2. Year-over-year, 34%
held higher balances at the end of June 2013 than they did in June 2012, while
23% held smaller balances.

Additionally, the forward-looking
indicator measuring expectations for increasing cash went from a reading of -5 for Q2 to
+14 for Q3, further signifying cautious attitudes among treasury departments.

Canadian corporates are in a similar situation. In fact, late last year
finance minister Jim Flaherty pressed Canadian corporates who are “awash in
cash” to invest some of that money in public infrastructure projects.

Michael Connolly, CTP, vice president, treasurer at Tiffany & Co. and past
chairman of AFP’s board of directors, believes that treasurers across North America
are generally still in “wait and see” mode. “There are so many factors and
moving parts in play – whether from a specific geographic region perspective or
from a multinational cross-border perspective,” he said.

“And, too many of
those factors are subject to subjective human decisions, as opposed to objective
market forces. Plus, everybody comes up with their own interpretation whilst
reading between the lines. How can one confidently predict what’s next?”

The Burning Questiom

One factor on everyone’s mind is when Federal Reserve chairman Ben Bernanke
will begin to taper the quantitative easing (QE) programme. Federal Reserve Bank of St. Louis
president, James Bullard, told Bloomberg last week that the Fed may begin making
small cuts to its bond purchases as early as next month. However, that statement
came shortly after the Fed surprised markets on 18 September by maintaining the programme’s status
quo after it received weaker-than-expected economic data.

Even if tapering
begins, Connolly is not convinced it will have a drastic impact on treasurers’
spending decisions. “I’m not sure the market will be able to anticipate the more
global impact of what may happen in the countries that hold the US dollar (USD) as a reserve,”
Connolly said. “All in all, trying to summarise, there is nothing among
everything that is at play that I see that could be tabbed ‘business as usual.’
It’s all new ground.”

Lacking a crystal ball, treasurers are relying on
recent painful experiences to inform their guarded approach. “In the last five
years, treasurers and finance departments have been faced with a number of
challenges, including sequestration, budget impasses, the debt ceiling and the
US downgrade, along with a general worldwide recession,” said Anthony
Scaglione, CTP, senior vice president, mergers and acquisitions and corporate
treasurer for ABM Industries Inc. and also an AFP board member. “In my opinion,
treasury departments have done a phenomenal job at navigating these pitfalls.”

Scaglione is cautiously optimistic about the current economic environment,
because he is confident that treasurers can weather any storm that lies ahead.
“We are well-prepared should the economic underpinnings of the US and world
economies not sustain the recent growth,” he said. “I think treasury, as a
function, has been strengthened by the past few years and hopefully this will
prepare us for the next headwind in much better shape than before.”

even though recent economic growth in the US has perhaps not improved enough
to merit QE tapering, Canadian onlookers have taken notice. Warren Jestin,
senior vice president and chief economist at Scotiabank, noted that Canada’s
economy is still stronger than that of the US in many respects. With its stronger
employment profile, the fiscal situation is better and the banking system more robust.

the reality is, we’re lagging the US in growth,” he said. “The US is finally
getting into gear. You see it in auto sales, which have been surging recently.
You see it in the housing market, which is improving substantially.”

whose economy is stronger then? “Overall, this catch-up is occurring in the US
after a very slow initial start following the financial crisis,” Jestin said. “Their
growth is going to be a little more than 2% this year, our growth will be
under 2%. Still, when you compare the various fundamentals, this side of
the border is where you want to live.”


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