What is next for the world’s biggest economy? With the White House and both chambers of Congress all controlled by one party, will that actually translate into legislature being passed? Perhaps there is now a better chance of passing comprehensive tax reform. It appears there are three key areas of focus emanating from the Trump organisation that are all positive for the US economy and growth: cutting taxes, infrastructure investment and less regulation.
As was revealed in the just-released Association for Financial Professionals (AFP) 2017 Risk Survey, one of the top three risk factors having the greatest impact on organisations’ earnings over the next three years is “US political and regulatory uncertainty.” To be fair though, the one negative wild card is on trade – what will happen? This is exactly what played out in the markets as things unfolded throughout election night two months ago, going from fear to one of understanding the possibility of positive growth imperatives. Accordingly, by the end of the next day the markets had completely reversed course.
Across the Atlantic
Over the past year, populism has grown in strength and is sweeping the globe more forcefully and pervasively. This is evidenced by last June’s referendum in the UK, where a majority opted to leave the European Union (EU), aka Brexit and, of course, the US vote for Donald Trump. Then there was the rejection of referendums in Italy and the resignation last month of prime minister Matteo Renzi. Next are potential large gains by conservative parties in the French and German elections coming up later this year.
Given that political backdrop, there are other geopolitical concerns manifesting themselves on the global stage as well. One of them is the tensions rising over the perceived territorial grab by China in the South China Sea. What this writer hadn’t realised until recently is that 60% of all world trade passes through those waters. China could conceivably establish quite a choke-hold there. Obviously that would not be good; nor would the US or other countries permit it to happen. Nonetheless, right there one can imagine a potentially huge conflict.
Moreover, bordering that body of water is the Philippines whose newly-elected president, Rodrigo Duterte, has just stated that he is allying with China and no longer the US. America has military bases in the Philippines! What’s more, let us not forget all of the conflicts in the Middle East, where the entire region appears to be burning. The most dangerous situation there is the one in Syria of course and the potential conflict lining up between Russia and the US. Is there any need to go on? Let’s not; it’s depressing enough. Certainly not bullish for markets.
Markets: Speaking of which, let’s turn our attention to those. No doubt the volatility of the foreign exchange (FX) markets will continue. Many questions surround many currencies. Will the British pound (GBP) rebound, or continue its slide? It all depends on what a Brexit really means. Will it be hard and resolute, or will the UK somehow remain in the EU as a trading partner? Interest rates in the US are finally rising and should continue to do so over the course of this year, while one might add that other central banks will be less accommodative as well. That should also affect currency prices. Fortunately, the commodity markets seem to have stabilised somewhat, which should be good for global trade and business. Of course, potentially offsetting that is the anti-trade sentiment born out of the populist movements previously mentioned.
Fintech: Switching gears a bit, but mentioning something very real affecting financial institutions and payments globally is financial technology (fintech) and the advent of blockchain. While this could be disruptive to financial institutions, by adopting the new technologies and embracing them they could also create a new wave of opportunities for themselves. Of course, there are many other technologies besides blockchain that are being developed and which will make business processes more efficient and less costly, leading to the ability of businesses – and therefore corporate treasury and finance – to focus more on value-added activities and being a business partner.
Corporate treasury: Treasury and finance leaders need to transcend the issues they face today and will face in the future. The world certainly is a complex place in which to operate, and therefore finance needs to be able to incorporate predictive analytics and even artificial intelligence (AI) into its analysis of financial and business trends. Corporate treasurers need to be looking forward, even trying to peer around the corner to see what risks and opportunities exist ahead of them. These constant developments and changes have been and will remain the core challenges which treasurers face. Treasurers are breaking traditional boundaries to keep pace and the typical responsibility of the treasurer has widened to include pensions, insurance, working capital, supply chain finance, investor relations, enterprise risk and merger/acquisition (M&A) activity. Is there a Chief Treasury Officer title in the future?
To conclude with, here are three takeaways to reflect on:
- We’re living in an extremely fragile political world. The slightest unpredictable event shakes up markets and entire economies. Treasury and finance executives must learn to stop overreacting to every event in the 24-hour news cycle. Create a strategic plan with buy-in from senior management and stick to it.
- Markets are reacting to the positive economies in a Trump platform… for now. Yet, as we all know, seemingly anything can set markets on edge. Trump hasn’t even been sworn in yet; let’s wait and see what he and Congress will do. You need to be more informed about current events than ever -and more discerning about what’s really important and what’s just noise.
- Treasurers need to continue to expand their horizons. If you can stay above the fray you won’t get caught up in hype or despair. It’s time for treasurers to transcend their surroundings.
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