Global Outlook ‘Could Be Worse’

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Global Outlook ‘Could Be Worse’

The Assistant Treasurers’ Group of Thirty discusses tax reform, the political economy, superforecasting and blockchain in meeting sponsored by Credit Suisse. 
 
Tax reform: Preparing for the unknown. Most AT30 members pointed to tax reform as their companies’ top priority, despite its uncertain outcome, and a majority said they’ve prepared various scenarios for senior management. On the topic, Credit Suisse’s Sal Seguna compared the Trump Administration’s and Congress’ proposals, laying out and contrasting their components. The controversial border adjustment tax (BAT) will likely be reined in significantly, he said, and limiting debt-related deductions will face major hurdles. Since the legislation will probably utilize the reconciliation process to skirt a Democratic filibuster, it must be revenue neutral — unlikely — or it will have to sunset in 10 years. If the healthcare repeal and its tax cuts die in the Senate, the corporate rate is unlikely to drop beneath 25%, Mr. Seguna said. Lowering individual tax rates will likely be a political necessity, flowing retail money into fixed-income and tightening spreads. If corporates spend too much repatriated cash on buybacks and dividends, Credit Suisse believes the rating agencies may eliminate “net debt” treatment, pressuring ratings downward.
 
The times they are a changin’. One member company recently begun shifting its massive investment portfolio to safer territory. Traditionally split into buckets for operating cash, short-term investments and a strategic return portfolio, the treasury department has improved its operational efficiency, cash forecasting and pooling structures to identify excess cash more quickly and move it into higher yielding investments. With global volatility and a diverse collection of businesses to manage, the member decided it was time to reduce investment-portfolio risk. The portfolio will have a shorter duration with maturity limits on securities, and its allocation to agency mortgage-backed securities will shrink.
 
Global outlook? Fair to middling. A trio of experts from Credit Suisse updated members on changes in the global markets and political economy. Their message: Things could be worse. Optimism will likely taper as uncertainty grows around Republicans achieving their policy goals. Two additional rate hikes are more likely than three. And the Fed is likely to change its formal investment policy and seek to shrink its balance sheet, potentially sapping economic growth if offsetting measures such as easing Basel III take too long to arrive. Finally, expiring terms at the Fed will enable the Trump administration to significantly shift monetary policy. Obamacare repeal is unlikely before summer, and tax reform is unlikely before first quarter 2018. Credit Suisse foresees inflation remaining muted. 
 
Watch out for superforecasters. Keep your eyes open for what Michael Mauboussin, head of global financial strategies at Credit Suisse, calls “superforecasters.” They are exceptionally talented at making political, economic and social forecasts, stomping control groups by double-digit percentages and even CIA analysts by 30%. Superforecasters understand clearly what they know and what they don’t, they actively seek other points of view, and they perform even better in teams. 
 
The biggest development no one understands. Last year, the announcements about blockchain initiatives arrived one after the other, but assistant treasurers were apparently too engrossed in integrating mergers and cash forecasting to learn the ins and outs. Nevertheless, numerous AT30 members expressed interest in better understanding the distributed database technology, which encrypts information into immutable blocks and may ultimately make many costly intermediaries obsolete. 
 
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