How Challenges In Commodity Trade Finance Are Creating New Investment Opportunities

2020 certainly has had many challenges across markets, and trade finance has been no exception. Trade finance is critical for global companies for support of operations and to enable the expansion of trade and growth. The COVID-19 pandemic has fueled a growing funding gap and has exposed supply chain vulnerabilities, with real economy participants pressured to seek alternative funding sources. This has created an opportunity for institutional investors in search of yield that complements existing portfolios with credit, duration, and liquidity diversification.

Trade finance includes several different forms of financing and payment methods to facilitate domestic and international trade of manufactured goods and commodities. Commodity trade finance supports end-to-end commodity flows across the energy, agricultural and metal commodity value chains, including producers, processers, consumers, and traders. Trading intermediaries, such as banks and other financial institutions, provide many financial products to reduce payment and supply risk. Financing solutions can provide advance payment to the seller, while extending payment terms to the buyer, enabling both parties to manage working capital more efficiently.

In our opinion, trade finance-related investments provide superior risk-adjusted total returns (i.e., vs. Treasuries) with historically low volatility, consistent cash flow, and low correlation to other asset classes. Eurekahedge Trade Finance Hedge Fund index returned 5.34% and 6.7% in 2019 and 2018, respectively.

Source: Eurekahedge as of May 31, 2020

The International Chamber of Commerce (ICC) estimated that in 2016 the total global trade finance market was approximately US$16 trillion and predicts that it will reach US$19 trillion in 2020. In the wake of the pandemic, a significant funding shortfall is expected. In July 2020, the WTO and ICC issued a joint statement estimating that up to US$5 trillion may be required to finance a rapid rebound in global trade flows.

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