Stuart Roberts is Managing Director, Global Head of Trade at J.P. Morgan. In this exclusive interview with GTR, he provides his take on the current state of global trade and the ways in which the bank is bringing a unique perspective to unlocking access to finance and encouraging a move towards more sustainable practices.
GTR: As global head of trade at an industry-leading trade and export finance bank, in your opinion, what is the definition of trade in the 21st century? How has this shifted?
Roberts: At its core, 21st century trade doesn’t really look that different to, say, 11th century trade. You’ve got a buyer who wants something, and then you’ve got somebody who spots that market demand, and sets themselves up to become a supplier, or seller, of that product or service.
I’m a firm believer in the key insights of classical economists, such as the ‘invisible hand’ of Adam Smith and David Ricardo’s principle of ‘comparative advantage’. Both theorists believed that economies function best when they are left alone by governments – clearly that’s not the world we live in today.
Still, the essence of these pioneering economic concepts exist at the centre of global trade today. In terms of the invisible hand, mutual economic benefit continues to bring together people of goodwill as buyers and sellers – and I don’t think that will ever change. What will change is the way that it’s conducted: the technology, transport and geographies, as well as what is being traded. Likewise, the comparative advantage still holds true, and some nations will always reap greater benefits for producing certain goods and services.
We’ve clearly seen changes in technology and industry, but that’s just the nature of human innovation. Global trade has gotten faster and faster every decade since the Industrial Revolution, and the recent acceleration of digitisation spurs that development.
GTR: As we embark on a new era of trade, given recent trade tensions, is globalisation and multilateralism in jeopardy?
Roberts: I think political, industry and finance leaders – particularly those in the West – have done a poor job of articulating the value of trade and globalisation. The forces of globalisation have left some people feeling left behind, which has led to deep and bitter societal divisions. But the rewards of globalisation are too important to give up. The globalisation of trade has been the driving force for human progress over the last thousand years.
One big question for me is what is the future of the big multilateral organisations, and will they be backed by the new global players, such as China? Will those players support multilateral agencies to the same extent that the US has done? Will that change over the next 10 years?
Another big question is will the dollar continue to be the global reserve currency? The US Federal Reserve has adopted the role of lender of last resort, its swap lines serving as an important liquidity backstop domestically and abroad, and reinforcing multilateralism. The world has implicit faith in the dollar.
My big concern with a very loose monetary policy is are we effectively devaluing that reserve currency status? Will that lead to a loss in faith in the dollar?
GTR: Where do we want to get to? What does a trade ecosystem utopia look like? And what are J.P. Morgan’s priorities around trade innovation and digital leadership?
Roberts: In terms of digital leadership, we welcome any standard and format that improves the efficiency of not only domestic and cross-border trade, but also our ability to process it efficiently, and which helps us with sanctions and anti-money laundering. What we’ve struggled with is that the industry has yet to agree on common standards. There are a lot of ecosystems, many of which operate in siloes, so as a bank we end up having to integrate with everyone.
The digitisation of technology is there – that’s not the issue. But I think we’re a long way away from reaching a utopia. One of the main reasons is that, as financiers, we don’t yet have end-to-end visibility of the trades that we’re financing – we only really have full transparency on the very final leg. We also face challenges around legal and regulatory frameworks: only a handful of jurisdictions around the world have enacted the law that gives electronic trade documents the same legal standing as their paper-based counterparts.
The question is not whether we can adapt to the technology – because we can – it is will the regulatory structures be in a place to encourage the adoption of those processes? So far, the answer is no.
GTR: Environmental, social and governance (ESG) considerations, already a key issue for trade before the pandemic, have come into sharper focus over the last year. What are some of the bank’s key priorities in the ESG space?
Roberts: As a firm, we have our own priorities around ESG. In the US, we’re part of the Billion Dollar Roundtable, which recognises companies that spend over a billion dollars with minority and women-owned suppliers every year.
This is a rapidly evolving space, and I’m proud of the fact that we’re one of the leaders in ESG financing in trade. But it is nuanced, and I think that as an industry, we need to start to differentiate what ESG means, because the focus differs across geographies. In Western Europe, ESG has become very concentrated on the ‘E’, the environmental aspect. In the US, it’s very focused on the ‘S’ and minority and diverse-owned companies. In Asia, to the extent that it has started to register – largely because of outside influence – efforts are centred around making changes to unfair, or predatory, labour practices. In Africa and Latin America, the spotlight is predominantly on ‘G’, governance.
ESG has become a universal theme at the top of the global agenda, driven almost entirely by consumer demands and expectations. Our job is to help companies deliver on those goals being led by consumer behaviour. We are about to launch a very large pre-shipment programme and product, predominantly focused on the US to begin with, which uses our supply chain finance rails to deploy early stage capital into minority and diverse-owned suppliers.
We’ve also been doing a lot around incentivising behaviour between buyers and suppliers, and that – together with what we’re doing in our export agency finance teams, working with export credit agencies around the world – will continue at pace.
Our focus is on being a partner that can advise and act in the ESG space, and then bring in reputable third parties who can adjudicate on those goals.
GTR: As outlined in the insights from J.P. Morgan’s Working Capital Index 2021 H1, with economies rebounding, treasurers are likely to be shifting away from cash preservation to cash deployment strategies. What role can working capital management play in helping companies invest towards growth?
Roberts: In a very straightforward way, it’s an efficiency play.
The problem we have at the moment is that we’ve got all of this surplus liquidity in the system. This is driving up asset prices, creating even more of a chasm between the ‘haves’ and the ‘have nots’. In the corporate world, the haves are looking to deploy that excess cash – and that’s one of the reasons why we’ve seen global merger and acquisition activity reach new heights. This hasn’t been great for companies to realise the value of working capital and the better rates of return – one doesn’t necessarily have to be efficient when there is a surplus.
So, I welcome Fed tapering. If you look at returns on invested capital across China, Western Europe and the US, outside of a few tech companies that have done very well, these have generally been declining every year for the last couple of decades. Shareholders are not holding anybody accountable for this decline, but they will, and eventually they’ll be demanding better and better returns as liquidity recedes. That, for us, is going to be the big thing in terms of driving that working capital benefit, which will then boost return on invested capital.
GTR: What are going to be some of the key working capital trends that emerge over the course of 2022?
Roberts: There are three levers here: payables, inventory and receivables.
For payables finance, the amendments to financial statement disclosure requirements that have started coming through from the International Financial Reporting Standards (IFRS) Foundation and the Financial Accounting Standards Board (FASB) will cause some disruption in terms of the adjustment for supply chain finance – particularly for European banks, which have been a little more relaxed in terms of an overall structured finance policy.
When it comes to inventories, one thing Covid has taught companies is that as effective as just-in-time systems are, they do not incorporate the resilience that is required when supply chains are disrupted. We’ll start to see negotiations between buyers and sellers ramp up as they rethink their strategies around stockpiling and minimum amounts of inventory, which will increase the working capital burden for either, or both, parties. We intend to fully provide innovative products and solutions to support their needs.
For receivables, the biggest theme will be the adaption of receivables into contracts, and contract monetisation. Many aspects of our lives are moving to a software as a service model, and I think that evolution will continue. That’s also going to be another big area of focus for us.
Finally, it’s the rise of e-commerce and the opportunities we can harness in that rapidly evolving space. Banks may not necessarily be the first port of call for e-commerce companies looking for financing, but that’s where we plan to be. It goes back to our earlier discussion: trade today doesn’t look all that different to trade in centuries past in that it involves a buyer and a seller; but the way it’s conducted has changed dramatically, and we fully intend to be the leading trade bank right at the core of that.
In this episode of the GTR Trade Insights podcast, we speak to Stuart Roberts, Managing Director and Global Head of Trade at J.P. Morgan, who shares his insights on some of the dominant narratives in trade and working capital finance today.
The discussion touches on changes in technology and industry, the next steps for digitisation, and the rapidly evolving space of ESG. Roberts also outlines the bank’s own areas of focus in terms of its alignment with these themes.