A Mature Economic Expansion Comes with Emerging Risks
For corporate cash investors managing portfolios during an economic expansion, “what goes up, must come down” is a good rule to live by. The current decade-long expansion in the U.S.—among the longest on record—has defied that maxim so far. But as it matures into old age, risks for investors are reemerging.
Our November white paper, Shifting Dynamics of a Maturing Expansion, is the first installment of a two-part series that looks closely at some of those risks. It points to the resurgence of volatility in equity markets, the tightening of credit conditions, and the uncertainty around trade policy as emerging concerns that should motivate investors to take a closer look at their exposures.
In the credit markets especially, we are starting to see some warning signs. To cite just one example, in the higher-risk corners of debt markets, investors are starting to demand higher returns and have increased the cost of insuring high-yield debt exposure. With many credits hovering at the borderline of junk-rating status, there is a risk that downgrades may be substantially higher than historical averages when the business cycle turns. If and when that happens, cash investors who have taken pre-emptive action may be ahead of the curve.
Many treasury professionals who joined their organizations in the past decade have never experienced a downturn. Fortunately, there are tried and true strategies for managing risk in cash portfolios in the later stages of a business expansion. Now, with the credit cycle maturing, the time for complacency has passed. Institutional cash investors should increase monitoring of their portfolios and be cognizant of potential emerging exposures.
For a better understanding of the economic changes and investment risks that come with a mature expansion, download the first of our two-part series here.