Trade finance offers greater diversification

Trade finance is weathering the economic storms of the coronavirus pandemic and still offers insurers looking for greater diversification an attractive investment opportunity.

This was the key message from an Insurance Investment Exchange CIO virtual roundtable held in conjunction with Allianz Global Investors.

Trade finance has been growing modestly as an asset class since the global financial crisis as the banks that traditionally dominated this sector were forced by tougher regulation to cut back on non-investment grade investments. This created an imbalance in supply and demand which opened up the market to other capital providers.

This imbalance has been exacerbated by the pandemic as many of the large credit insurers have cut their limits, forcing businesses to explore other financing options to plug the growing gaps.

Allianz Global Investors set out its stall to exploit this opportunity and promote it to insurers last year when, at a previous IIE roundtable, it explained how this relatively new asset class might fit into an insurer’s portfolio.

It believes that opportunity is still there as the economy opens up again and revenues start to flow again and, as they do, repayment of credit lines has recovered. Some participants were concerned that this might be slightly illusory as firms could be facing credit that was nearing its maturity and so were faced with a pay up or default dilemma. This wasn’t the experience of the trade finance partners Allianz works with as they were enjoying hard revenues, although some defaults among smaller firms were always part of the trade finance game.

The keys to success in this sector are research, quality partners, diversification and flexibility. Experience shows that investors who are prepared to change their focus over time are more successful. The short-term nature of trade finance means that portfolios can be reshaped very quickly, making it potentially attractive as an asset class for property and casualty insurers felt some of the participants.

The polls among the CIO participants showed that there is interest in trade finance as a diversifier but they still felt they needed greater understanding of the underlying assets and how they performed.

Report by David Worsfold