Global trade has been in the spotlight since the Covid crisis. Lockdowns, supply chain bottlenecks, and geopolitics have upended the status ante, and observers now speculate about a paradigm shift away from the liberalised, globally integrated, rules-based trading system to one de-facto dominated by power politics and regionalisation.
Against this backdrop, one can easily be mistaken for inferring that global trade finance activity will also suffer from the many challenges reshaping global trade.
In fact, various indicators tell a different story about what's happening with global trade finance.
At a macro level, current WTO forecasts[1] suggest the ratio of global trade to GDP growth will largely maintain the 1:1 relationship held since declining from the 2:1 trend prior to the Global Financial Crisis.
Industry surveys point to growing trade finance activity, with the World Supply Chain Finance (SCF) Report[2] survey reporting a 38% increase in SCF volumes in 2021, a growth rate broadly similar to the prior year.
Similarly, Factors Chain International (FCI)[3] reports a 12.6% increase in the more established market for receivable finance over the course of 2021.
More telling, the ADB reports[4] a widening of the mismatch between supply and demand of trade finance, with the global Trade Finance gap growing to $1.7 trillion over the course of 2020.
These indicators all point to a growing demand for trade finance despite the change and uncertainty.
Across industries, a higher level of working capital is required to operate in today's environment, which helps explain why trade finance is growing.
Broad based inflation has increased input costs and the capital required to purchase and carry inventory.
The bottlenecks in global shipping and warehousing are extending the cash conversion cycle for companies.
Demand patterns and access to supply are more volatile, and companies increasingly carry more inventory to ensure continuity and growth of sales.
What does this mean for trade finance investors?
The corollary to the new drivers shaping global trade is the increased working capital to sustain it. This is accelerating the need for alternative sources of working capital to augment traditional bank financing, already underway in response to increased bank capital reserves.
For private market investors it offers the opportunity to access an asset class well suited to today's conditions[5], while also helping to fuel the engine of the real economy.
To find out how Allianz Global Investors' trade finance offering can benefit institutional investment portfolios, click here
1 https://www.wto.org/english/news_e/pres22_e/pr902_e.pdf
2 https://bcrpub.com/world-supply-chain-finance-report-2022
3 https://fci.nl/en/news/press-release-fci-world-factoring-statistics-reports-largest-double-digit-increase-volume-over
4 https://www.adb.org/news/global-trade-finance-gap-widened-17-trillion-2020
5 https://uk.allianzgi.com/en-gb/institutional/our-strategies/trade-finance/trade-finance-a-resilient-asset-class-for-any-market-environment
This post is funded by Allianz Global Investors
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