Money managers may have found a lucrative business that few knew existed: financing global trade.
What Is Trade-Finance?
Large banks typically facilitate global trade by providing loans or even buying an exporter’s accounts at less than book value as part of an investment known as trade-finance, according to The Wall Street Journal. But some major banks have recently scaled back their ventures due to shifts in capital requirements. This creates an opportunity for money managers who were looking from the outside to enter the space.
Nonbank financial institutions like money managers facilitated just $100 billion worth of trade in 2018 but this figure could double many times over to $3 trillion in the next few years from banks exiting the space.
Needless to say, this new venture comes with its own set of advantages and dangers. On the positive side, money managers entering the space for the first time can generate superior returns compared to bonds. Money managers are especially interested in finding new alternative asset classes at a time when attractive yields are becoming more difficult to find.
On the other hand, money managers have spent decades picking stocks and bonds and many could be unprepared for new exposure to global trade. Some of the specific risks highlighted by WSJ include money managers being stuck with defective or damaged goods or factors completely outside their control, like changing tariffs and currency swings.
“Clearly, the more velocity you can get in terms of transactions, the more you can continue to grow your business and not increase your risk-weighted assets,” James Binns, head of trade and working capital at Barclays told WSJ in an interview. “The complexity is around investors understanding exactly what they’re investing in.”
How Much Can Be Made?
Some of the less-risky ventures could generate a return of around 2% which would be ideal for pension funds and insurers with lowe risk profiles. Riskier ventures would be mostly reserved for hedge funds who could generate returns of up to 10%.
Supporting Global Trade
Granted, money managers are interested in generating a return but their involvement in trade-finance could indirectly support global economic growth, according to WSJ. As it stands today global trade is set back by a $1.5 trillion “trade-finance gap,” according to the Asian Development Bank.
Money managers can step in and fill the void to help countries better access the international market to sell their goods. Otherwise, some regions could be completely cut off from global trade.