Partner Insight: Higher interest rates for longer make now the time to invest in trade finance

Sarka Halas
clock • 8 min read
Partner Insight: Higher interest rates for longer make now the time to invest in trade finance

Providing stable and predictable returns coupled with short duration, trade finance is a defensive fixed income strategy that can produce an attractive opportunity for investors, say David Newman and Martin Opfermann.

In a rapidly changing and uncertain economic landscape, investors are constantly seeking opportunities that offer both profitability and stability. As market dynamics evolve and in an era of interest rates that are expected to be higher for longer, trade finance has emerged as an attractive asset class.

Trade finance, which has maintained its resilience through recent economic uncertainty, provides a range of financing solutions which serve as the backbone of global trade. Indeed about 80 to 90% of world trade relies on trade finance.[1]

This new normal era of high interest rates heightens the attractiveness of trade finance as an investible asset class for investors who seek a haven from uncertain markets, a short-term maturity profile and low risk returns.

"The positive side of higher for longer means the front end of the rates curve is very attractive. Yields in sterling terms are around 7.5% for running 70-day risk. To get the same yield in public bonds markets, in the BBB-rated companies, investors are likely looking at a 9-year duration, which is a very different amount of risk," says David Newman, CIO Global High Yield, Allianz Global Investors.

"Rising interest costs are exactly the risk that trade finance is suitable for coping with because as costs rise and profitability goes down, we rotate out of those sectors or positions," says Martin Opfermann, Lead Portfolio Manager, Co-Portfolio Manager of ALWOCA, Allianz Global Investors.

A haven from market volatility

For institutional investors, allocating to trade finance means high quality credit at an extra premium. Investors are insulated from the shocks seen in public equity and bond markets largely because the short-dated corporate payment claims are unaffected by market gyrations.

"This could really suit investors who want a higher yielding, low volatility, and limited correlation strategy with not too much credit risk in the portfolio. With the shape of the yield curve, it could work well right now," says Newman.

While credit risk is low, it is still present and can heighten during a recession or if companies carry too much debt. In the latter case, businesses will restructure while continuing to trade.

"By continuing to trade, you often see lower default rates and higher recovery rates for the average rating than you would see in public markets. That gives you a dampening of volatility and of correlation," says Newman.

A strategic position in a portfolio

For firms such as insurance companies, trade finance assets are attractive due to their short-term maturity profile and low volatility. The asset class can be used as a replacement for government bonds due to its stability and insensitivity to rate changes.

"Low duration, high spread is good for insurance companies because the solvency charge is low. Investors are getting a similar spread on a trade finance portfolio as a high yield bond portfolio with approximately 25% of the capital charge," says Newman.

Trade finance assets offer a significant opportunity for institutional investors like pension schemes that want exposure to private markets but must retain liquidity to fund capital calls.

"It works as a cash substitute due to the short duration and similar yields. Currently, because of the yield curve, investors are looking at it as an instrument that can be used as part of a liability-driven investment strategy rather than using a multi-asset credit strategy and duration overlay," says Opfermann.

"If investors want yield but are also afraid of missing out on the income, the sector really has appeal because you can take the exposure and can capture the spread and the yield, but you can also manage risk actively," says Opfermann.

Complexity and risk require transparency

While structuring a trade finance asset vehicle is complex and operationally intensive, the complexity gives investors a pickup in premium. The key to the AllianzGI strategy is that it is structured like a global credit fund with clear diversification rules and its own proprietary securitisation vehicle.

"We have no more than 5% in our biggest credit, no more than 25% in our biggest sector, we have over 80 names in our portfolio and no reliance on one source of finance," says Newman.

While credit default, fraud, and insurance are all risks that come with the asset class, AllianzGI reduces those risks through utilising a number of sourcing partners and conducting its own transaction analysis.

"[The securitisation vehicle] means we can see everything coming through. We make sure the payments come in when they are meant to be and if they do not, we stop extending credit straightaway. We do not rely on anybody else to tell us. It means we have full transparency" says Newman.

DOWNLOAD THE WHITEPAPER HERE

 

This article is sponsored by AllianzGI


[1] https://www.wto.org/english/thewto_e/coher_e/tr_finance_e.htm#:~:text=Some%2080%20to%2090%20per,of%20a%20short%2Dterm%20nature.

For professional investors only, strictly private and confidential solely for the intended recipient. ​Trade finance investments are designed for professional investors only and may be illiquid in nature. This document is not a contractually binding document, or an information document required by any legislative provision, and is not sufficient to take an investment decision.  This is a marketing communication. Please refer to the legal and regulatory documentation of Allianz Working Capital Fund a sub-fund of Allianz Trade Finance Funds SA, SICAV-RAIF (the "Fund") before making any final investment decisions.

Target return assumptions may be based on the investment team's experience with predecessor funds, market participants and other stakeholders of the industry. Actual returns from an investment in the portfolio over any given time horizon may vary significantly from the target return assumptions. Future performance is subject to taxation which depends on the personal situation of each investor, and which may change in the future.

To the extent we express any prognoses or expectations in this document or to make any forward-looking statements, these statements may involve risks . Investments in the Fund entail a high degree of risk and no assurance can be given that the investment objectives will be achieved or that investors will receive a return on their capital.  Please refer to Fund legal documentation for a full description of General and Specific Risk Factors.

Actual results and developments may therefore differ materially from the expectations and assumptions made. On our part, there is no obligation to update target return assumptions and forward-looking statements presented herein.

Allianz Global Investors may terminate arrangements made for marketing, including by way of de-notification.

Investing involves risks. The value of an investment and the income associated with it can go down as well as up. Investors may not get back the full amount invested. Past performance does not predict future returns. If the currency in which the past performance is displayed differs from the currency of the country in which the investor is resident, the investor should be aware that the performance shown may be higher or lower due to exchange rate fluctuations when it enters the local currency of the investor is converted. The views and opinions expressed herein, which are subject to change without notice, are the views and opinions of the issuer and / or affiliates at the time of publication. The data used come from various sources and are believed to be correct and reliable. The terms and conditions of all underlying offers or contracts that have been or will be made or concluded take precedence. This document does not contain any statements about the suitability of the investments described here for the individual circumstances of a recipient.

For investors in the European Economic Area (EEA): For a free copy of the Fund legal and regulatory documentation, and/ or further information, contact Allianz Global Investors GmbH, either electronically or by mail at the given address. Please read these documents, which are solely binding, carefully before investing.  This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established branches in the France, Italy, Spain, Luxembourg, Sweden, Belgium and the Netherlands. Contact details and information on the local regulation are available here (www.allianzgi.com/Info). The Summary of Investor Rights is available in English, French, German, Italian and Spanish at  https://regulatory.allianzgi.com/en/investors-rights.

For investors in Switzerland: For a free copy of the offering memorandum, subscription documents and the latest annual report of the fund [the Swiss representative and paying agent BNP Paribas Securities Services, Paris, Zurich branch, Selnaustrasse 16, CH-8002 Zürich - only for Swiss HNWI although opted-out as professional investor] or the issuer either electronically or by mail at the given address. Please read these documents carefully before investing. This is a marketing communication issued by Allianz Global Investors (Schweiz) AG, a 100% subsidiary of Allianz Global Investors GmbH. The Summary of Investor Rights is available in English, French, German, Italian and Spanish at https://regulatory.allianzgi.com/en/investors-rights.

For investors in the United Kingdom: This is a marketing communication issued by Allianz Global Investors UK Limited UK branch, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk. Allianz Global Investors UK Limited company number 11516839 is authorised and regulated by the Financial Conduct Authority.  Details about the extent of our regulation are available from us on request. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors UK Limited. Contact details and information on the local regulation are available here (www.allianzgi.com/Info). This document is directed only at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Regulations 2013, as amended, and is accordingly exempt from the financial promotion restriction in Section 21 of the Financial Services and Markets Act 2000 ("FSMA") in accordance with article 29(3) of the FSMA (Financial Promotions) Order 2005. The opportunity to invest in the Fund is only available to such persons in the United Kingdom and this Document must not be relied or acted upon by any other persons in the United Kingdom.

More on Investment

TPT Investment Management launches two alternative investment funds

TPT Investment Management launches two alternative investment funds

Real assets and secure incomes funds seeded with £800m from TPT’s DB master trust

Jonathan Stapleton
clock 24 June 2024 • 2 min read
Partner Insight: Three ways social considerations can enhance portfolios

Partner Insight: Three ways social considerations can enhance portfolios

Yolanda Courtines, Dáire Dunne & Jason Goins, Equity Portfolio Managers, Campe Goodman, Fixed Income Portfolio Manager, Wellington Management
clock 24 June 2024 • 3 min read
Partner Insight: 10 trends driving the  global data centre market

Partner Insight: 10 trends driving the global data centre market

The data centre market is experiencing rapid growth. Here are 10 trends propelling the data centre economy and the reasons we believe investors should consider including them in their portfolios.

Principal Asset Management
clock 21 June 2024 • 5 min read
Trustpilot