Risk aversion highest since April 2022 as investors weigh gathering market headwinds

Risk appetite has deteriorated sharply in September to its lowest for nearly two-and-a-half years, according to S&P Global’s Investment Manager Index (IMI) survey. The IMI’s headline Risk Appetite Index has deteriorated further from the recent high seen back in May, slumping to its lowest since April 2022. The index has fallen from -10% in August to -29% in September, signalling increasing risk aversion over the past three months.

Similarly, investors have scaled back their expectations of market returns for the coming month, which are now at their gloomiest since January and among the most pessimistic recorded since the survey began in late 2020.

Sentiment has been hit by concerns over valuations amid economic growth worries and political uncertainty. Valuations have been seen as exerting the largest drag on US equities for three years, though the biggest drag is now the political environment, as uncertainty builds ahead of the US presidential election and worries persist regarding conflicts in the Middle East and Ukraine. Political risk is now seen as exerting its strongest drag since May 2023.

Adding to the downturn in market sentiment are persistent worries over economic growth, both in the US and more broadly at a global level. While both global and US recession risks were indicated to have eased compared to August, September’s readings were the second lowest since late last year, with concerns especially widespread regarding global economic risks.

The survey indicates that, while a majority of almost 57% of investors expect the US to avoid a recession in the near term, the near-44% proportion of those expecting a recession is running at its highest since last December. Although only 2% expect a deep recession, only 2% also expect to see strong economic growth.

Helping soothe recession risks is the expectation of central bank support via lower interest rates, which is now providing the strongest lift to the markets since June 2020. The majority of investors now expect the Fed funds rate to be cut by 50-75 basis points in 2024. However, only 3% of respondents forecast rate cuts of 100 bps or more. These lower interest rate expectations have meanwhile pushed investors to lower their anticipated US dollar index forecasts. The September survey signals the most bearish view for the dollar since December 2022.

In this environment, sector preferences have shifted further to the defensive. Most in favour are healthcare, utilities, and, to a more modest degree, consumer staples. The prospect of lower interest rates has also helped push investor appetite for real estate to its highest since August 2021 and also encouraged more interest in financials.

At the other end of the scale, worries about slower economic growth have pushed investor sentiment toward consumer discretionary sharply lower, with basic materials also suffering the worst investor favour for two years. However, the sharpest negative swing in investor sentiment has been seen for energy, as economic growth worries push sentiment to its lowest since November 2020. Negative views toward industrials are meanwhile at their lowest since last October and tech sentiment is at its lowest ebb since January.

 

Banks to use genAI to meet instant payments project challenges

Over half (54%) of banks are planning to leverage generative artificial intelligence (genAI) for the shift to instant payments and other payment modernisation projects, while four in ten (42%) are actively considering the possibility. This is according to research from RedCompass Labs.

The report, ‘AI in payments: The future of payments modernization?’, includes findings from a survey of 200 senior payments professionals at EU and US banks, which examined their views on generative AI, their expertise, and their approach to AI in payments modernisation. 

Nine in ten (91%) banks rank payment modernisation as either important or very important. However, these projects are draining time and budgets with banks spending upwards of US$100m on multi-year payments modernisation projects and hiring teams of 50 or more business analysts to deliver them. Two-thirds of a bank’s time and investment on these projects is directed towards project analysis, testing and business/system analysis, areas ripe for AI disruption.

The research also reveals that AI is already having an impact on headcount, with 38% of banks believing AI can already reduce the number of business analysts needed for these projects. An additional 27% anticipate this reduction will occur within the next 1-2 years and 28% foresee it happening within 3-4 years. 

Despite this, banks still believe human oversight remains essential. They believe in a balanced approach to human and AI collaboration, which is slightly tipped towards AI, with the minimum level consisting of 49% human and 51% AI involvement. Human involvement is most important for strategic tasks (37%), improving internal processes (34%) and customer experience (29%).

 

ScottsMiracle-Gro improves liquidity and streamlines cash flow management

Having strong working capital is essential, especially for companies that experience seasonal demand. ScottsMiracle-Gro, a lawn and gardening supply manufacturer, found that emerging from the pandemic, it faced higher debt levels, excess inventory and elevated working capital levels. The company sought a new accounts receivable solution to meet its funding needs. Its existing accounts receivable facility had run its course and was not fully leveraging its customer accounts receivable capacity.

With a long history of banking with J.P. Morgan Payments, ScottsMiracle-Gro reached out to find a more adequate funding mechanism. The bank worked with ScottsMiracle-Gro to identify an upgraded trade and working capital solution. “We wanted to elevate our working capital to better deliver for our customers and were looking for a new way to improve our business, funding sources and cost management,” said Mark Scheiwer, Vice President and Treasurer, ScottsMiracle-Gro.

With the new accounts receivable facility, ScottsMiracle-Gro can sell up to US$600m in eligible receivables to J.P. Morgan Payments. The Assistant Treasurer at ScottsMiracle-Gro, Brian Gorka, shared that under its previous solution, the company had only a US$400m cap to work with.

Now, with its increased funding potential, ScottsMiracle-Gro has added another big box store to its customer portfolio, which already has a number of other prominent suppliers.

“This accounts receivable facility is a terrific working capital tool that has really helped us manage the overall liquidity of the company,” commented Gorka.

Through true sales, J.P. Morgan Payments acquires full ownership of the receivables. ScottsMiracle-Gro continues to collect payments from those customers and, in turn, remits collections to J.P. Morgan Payments on the sold accounts receivable (AR). Scheiwer shared that, as a result, ScottsMiracle-Gro saves US$3-4m annually because the receivables are off the balance sheet.

The company had also been burdened by elevated pricing rates from its previous traditional asset-backed debt facility. Using the new facility, it took advantage of the high credit profiles of its “big four” customers and received a savings of 90-100 basis points. The new AR financing facility provides a 100% advance rate, which is a significant improvement over the previous rate of 80% that the company had been working with under the former accounts receivable facility.

 

A2A Payments to hit 186 billion transactions globally by 2029

The volume of global transactions via account-to-account (A2A) payments will rise from 60 billion in 2024 to 186 billion by 2029, an increase of 209%, according to a study from Juniper Research.

A2A payments, which are bank-to-bank transfers that do not require intermediaries, have gained global traction in recent years as instant payment methods have become commonplace. A2A has gained an advantage over other payment methods, with instant settlements and cheaper transaction fees than cards, increasing its desirability to merchants.

The report found that open banking developments have enabled the proliferation of A2A solutions. Variable recurring payments (VRPs), an A2A-specific solution in which customers connect authorised payment providers to their bank account, facilitate agreed recurring payments on the customer’s behalf within set limits. Consequently, businesses and banks have grown interested in VRPs due to their increased flexibility and transparency compared to direct debit.

The research found that instant payment roll-outs are creating A2A-based opportunities, even in traditionally card dominated markets like the US. For example, FedNow, the US’s most recent payment rail which launched in 2023, has an average transaction fee of 4 cents; this makes this solution advantageous when compared to cards, with an average fee of 3.5% per transaction. Therefore, as adoption grows and use cases multiply, cost-efficient A2A payments are likely to disrupt the card-dominated US market.

“VRPs provide a service not easily replicable beyond A2A, boosting A2A’s potential,” said research author Matthew Purnell. “Vendors must capitalise on this opportunity and offer merchants A2A-specific solutions that enhance consumer payment experiences like VRPs, improving satisfaction and rewarding repeated payments.”

 

Impellam Group scores US$400m trade receivables securitisation

Demica, a fintech offering working capital solutions, has supported Impellam Group following the landmark acquisition by Netherlands-based HeadFirst Global earlier this year.

Building on a long-term relationship with HeadFirst Global, Demica enabled a new US$400m trade receivables securitisation funded by Barclays, supporting the transaction through structuring, distribution and reporting. This provides HeadFirst Global with competitively priced capital, which enables the group to grow as it expands its operations.

“Working with our partners at Demica has been invaluable – their receivables finance expertise has been a crucial element as we structure this facility, helping us to remain a global leader in workforce and mission-critical talent solutions,” commented Tim Briant, Group CFO, HeadFirst Global.

Johannes Wehrmann, Demica’s Managing Director and Head of Corporate Solutions, added: “The facility will provide the company with capital to continue to grow across Europe, North America and APAC, with Barclays as its funding partner and supported by Demica’s best-in-class reporting solutions.”

 

Iceland expresses interest in joining T2 and TIPS

The European Central Bank (ECB) has welcomed a decision by Seðlabanki Íslands (the Central Bank of Iceland) to begin a feasibility assessment to explore the possibility of joining the Eurosystem’s T2 real-time gross settlement system and its TARGET Instant Payment Settlement (TIPS) retail payment system.

By joining T2 and TIPS, market participants in Iceland will be able to settle payments in central bank money in both euro and Icelandic króna. On behalf of the Eurosystem, the ECB is ready to facilitate this process and continue working with Seðlabanki Íslands during the next steps in the feasibility assessment. The assessment will initially focus on TIPS before looking at T2. The TARGET Services, which include T2 and TIPS as well as other services, are designed to promote a European payment landscape that is resilient, secure and efficient.

T2 is used for the settlement of large-value payments, while TIPS is used to process instant retail payments in real time around the clock, every day of the year. TIPS is designed as a multi-currency platform; currently it allows for the settlement of instant payments in euro and Swedish krona, while the Danish krone is being onboarded. Norges Bank has also expressed an interest in joining the system and adding the Norwegian kroner to the list of available currencies.