The development of trade finance as an asset class is at a comparatively early stage. EFA Group has collaborated with TXF to produce this market report that aims to identify the factors both driving and holding it back; and to evaluate which factors could stimulate a flourishing in the asset class over the next few years. The study relied on the participation of 50 investors from 15 countries.
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One encouraging finding from the report was the level of confidence in the trade finance asset class' growth trajectory, particularly among investors in Europe and Asia - although the greatest appetite for trade finance assets was seen in Asia Pacific, North America and MENA. Nearly half of respondents (45%) expect steady growth, while approximately one-third see growth accelerating, and that optimism increases over the longer term.
Some 58% of respondents are investing in internal infrastructure to enable them to invest in trade finance, underscoring their commitment to the sector in the longer term.
Trade finance assets are not expected to outperform other classes - instead functioning as a reliable, low- to medium-risk source of income. There was a mixed response to the option of investing a substantial part of a portfolio in trade.
Respondents were aware of and comfortable with taking on emerging markets risk through trade finance assets but said they were ready to compromise on returns for safer assets. Notably, they strongly disagreed with the argument that trade finance is "not risky" or that it should act as a parking spot for surplus liquidity.
The short-term and self-liquidating nature of assets and the low fixed yield income they generate motivate investment in trade finance assets according to the respondents - 65% of whom had a high to very high level of familiarity with the sector.
The most popular method of investing in trade finance assets is currently through a managed fund or directly on a bilateral basis, with asset-backed securities taking third place, the report showed.
Before trade finance can tap these opportunities however, more work is needed. To attract a wider investment base, respondents said that improved information, communication and transparency is key, as well as more reliable data to enable more robust risk management.
Encouragingly, a lack of awareness about trade finance assets – a relatively easily remedied obstacle – was one of the two most cited barriers to investing in the class, along with a focus on current assets. These were followed by an insufficient track record and a desire for more standardisation.