Your weekly economic update from the team at FXD Capital
Should corporate treasurers consider Bitcoin as a serious investment? That’s the question to ponder today.
There has been a slow and steady movement of corporate balance sheets experimenting with crypto holdings. While a list of publicly traded companies with disclosed holdings is skewed mainly towards businesses with underlying activities in the crypto space, well-known “traditional” companies are increasingly entering the area. Square (payments), MicroStrategy (software) and Tesla (cars) are three prominent businesses holding Bitcoin in their treasury portfolios. Morgan Stanley recently became the first wealth manager to allow its clients to invest in the asset directly via their services.
The essence of a treasury investment portfolio is to maintain business liquidity and lower overall capital costs through investing surplus cash. The principle argument for Bitcoin as an investment sits in the latter camp: Aggressive investment conviction for speculative purposes. The price rises seen have undoubtedly benefited holders over the past year. MicroStrategy has not only returned significant profits, but the attention garnered has propelled it into the public consciousness from a position of relative obscurity, which no doubt will open many doors strategically and commercially.
The more rational argument for Bitcoin as a treasury investment is for inflation protection. Because Bitcoin cannot be printed unfettered by central banks, this argument has legs and, over more extended periods, data may provide empirical evidence to support it. Counterparty risk may also be a factor; Bitcoins are encrypted and stored in users’ wallets, which theoretically could provide more assurance than a counterparty’s promises. Going back to the example of MicroStrategy, a diversification of the balance sheet into the crypto space may also represent an impetus to evolve the business into new areas.
The reason why you don’t see more corporates on the list is telling. Bitcoin is a very speculative asset, which is difficult to model out and match against liabilities. In recent times, its correlation has shown a tendency to follow growth equity stocks and traditionally, most corporate balance sheets stick to fixed-income investments. Unknowns are surrounding the regulatory oversight position, and indeed the influence large players exert over crypto prices and the underlying security of the market infrastructure. From a people perspective, introducing crypto as a treasury asset requires new knowledge and training to learn the processes needed.
Gilts are on track for their world quarter in two decades, with UK government debt on course for a 6.5% loss over the first quarter of the year. The fall highlights the growing divergence between UK economic optimism and Europe’s, whose respective major bond benchmarks have only lost between 0.5 and 3% over the same period.
While swap market predictions for central bank raises are still relatively benign, with the post-2008 “new normal” of 0.5% only being reached by 2028, just this past December, the equivalent prediction was below the current base rate of 0.1%
Inflation in the UK unexpectedly declined last month, printing 0.4% versus 0.7% in January. Reuters economists had predicted a 0.8% level, and the dampened result will strengthen the resolve of pessimists who dispute the recent spike in yields. As a mood contrast, flash figures for March purchasing figures showed the UK services sector outpacing manufacturing for the first time since the pandemic. With businesses ramping up orders ahead of lockdowns (hopefully) finally coming to a close, this leading indicator may be a sign that conditions are reverting to normal.
In a testimony to the House financial services committee, US Treasury secretary Janet Yellen raised the tax raise agenda to fund the expected $3 trillion of new infrastructure spending earmarked by President Biden. In the context of inflated borrowing costs from yield increases and the general fervour around bond markets, the comments were a reminder that fiscal policy is still a tool that has been primarily left unchecked throughout the pandemic.
New claims for unemployment benefits fell to 684,000, beating expectations and recording their lowest print for a year. The US economy shows continual progress towards healing faster than other nations due to its vaccine rollout and liberal approaches towards lockdown rules. US debt issuers have issued $140 billion of junk bonds over the past quarter alone, an unprecedented pace, showing both the appetite of lenders and borrowers’ sentiment is very much in line with the recovery narrative.
Eurozone manufacturing figures highlighted the resilience of specific sectors of the Eurozone economy, despite the prolonged effects of lockdowns and delayed vaccine rollouts. The IHS Markit flash purchasing managers index rose to 62.4 in March, the highest since it began in 1997. Downward pressure from the impeded services sector is still likely to push the bloc into a technical recession from two-quarters of economic contraction.
Economists are revising their economic forecasts for Europe en-masse as the reality of new lockdowns (i.e. France and Italy), and infection spikes hit. Berenberg forecasts placed a value of a 0.3% hit to Eurozone growth from each month of lockdown endured.
All the best for the week ahead,
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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