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Maximising business profits
How to invest your retained earnings
FOR business owners, managing cash flow effectively is a key component of success. When a business generates surplus cash beyond its current operational needs, one way to maximise value is by investing in the global fixed income market. Fixed income investments, such as bonds and other debt securities, offer a range of benefits including growth potential, diversification, and liquidity advantages. Here’s why allocating excess business funds to this market can be a smart financial move.
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Growth potential, possibly beyond that of your business
One of the biggest misconceptions about fixed income investments is that they only provide modest returns. While they are generally considered more conservative than equities, bonds offer attractive opportunities for capital appreciation and income generation. Investors enjoy:
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• Steady income streams: Bonds typically provide regular interest payments, offering businesses a reliable income stream.
• Competitive yields and capital appreciation: In environments of higher market volatility, it’s possible to generate double digit returns on bond trades
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• Interest rate arbitrage: Businesses can leverage interest rate movements across global markets, potentially increasing returns. As interest rates decline in one market, investors can enjoy the accompanying bond price appreciation.
• Currency diversification benefits: Investing in bonds denominated in different currencies can help hedge against local currency depreciation.
Diversification outside of your industry, market and country
The global fixed income market provides excellent diversification benefits for businesses looking to grow and be liquid despite the local environment.
• Geographic spread: Access investments in higher growth or more stable jurisdictions to offset the reliance on your local economic environment. Take advantage of the growth occurring elsewhere or access the safe haven you need to safeguard your capital.
• Industry diversification: Corporate bonds offer exposure to different industries, reducing the concentration risk associated with a single sector.
By incorporating global bonds into their portfolios, businesses can create a more resilient financial strategy, ensuring stability even in fluctuating economic conditions.
Liquidity Advantages: get your cash whenever you need it
Liquidity is an essential consideration for any business investing its surplus cash. Unlike real estate or private equity investments, global fixed income instruments provide businesses with a range of liquidity benefits:
• Ease of trading: bonds, particularly those from highly rated issuers and developed markets, can be quickly bought and sold in deep and liquid markets.
• Short-term and long-term options: Businesses can choose from a variety of maturities, allowing for better alignment with cash flow needs.
• Access to secondary markets: If a business needs to access funds quickly, many fixed income securities can be liquidated in the secondary market with minimal price disruption.
• Cash flow planning: The predictable nature of interest payments makes it easier for businesses to plan their finances effectively.
Investing surplus cash from your business in the global bond market offers significant benefits, including steady income generation, growth, diversification, and liquidity. With careful planning and a strategic approach, investing in fixed income markets can be an effective way for businesses to grow their reserves while maintaining flexibility and minimising risk.
This article was written with the assistance of ChatGPT.
Marian Ross-Ammar is vice-president, trading & investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm
