Trade Finance as An Asset Class
1. Low correlation to the other asset classes 1
Trade finance correlation with;
– Equities (S&P500 & MSCI Emerging Markets) is -0.06 & -0.08
– High yield bonds (JPM Global HY) is -0.2
– Leveraged loans (S&P/LSTA Leveraged Loan Index) is -0.10
– Hedge funds (HFRX Global) is -0.1
– Commodities (DJ-UBSCI) is -0.03
2. Industry wide low default rates and highest recovery time 2
Trade finance has the lowest default rates and recovery time relative to most asset classes;
– Default rates for a variety of trade finance products ranged from 0.03% to 0.24%
– Average recovery for trade finance products is 120 days, compared to 437 days for other
traditional asset classes.
3. Low exposure to volatile market cycles
– During economic downturns, strategic commodities such as metals, energy, and agriculture will still be produced, processed, and consumed. Financing them allows returns to be produced even during periods of recession.
– Tighter credit environments tend can be favorable since it commands tighter covenants,
lower LTV, and/or higher spreads on the loan
4. Self-liquidating loans
– Trade finance loans are used to finance transactions whose proceeds (from the sale of the goods) are in turn used to pay off and extinguish the loans. Self-liquidating loans reliably generate repayments.
1. Fastest growing major GDP in the world
- India’s GDP growth rate is at 8.2% in the second quarter of 2018
- 2018 annual growth is estimated to average 7.5%
- India’s GDP to continue growing near the 8% mark until 2022
2. Largest youth population in the world
- India has the world’s highest number of 10 to 24-year-olds, with 356 million—despite having a smaller population than China
3. Pro-business government enacting reforms boosting economic development
- Goods and Service Tax (GST) has modernized India’s archaic tax code
- New sectors opened for FDI, increased foreign investment limit of existing sectors and simplification of foreign investment policy
- “Make in India” campaign to elevate India as a manufacturing hub of the world
- Enhanced Foreign Trade Policy and new trade incentives such as Merchandise Exports from India Scheme (MEIS) proven successful in boosting India’s exports. FY 2018 exports at $313 billion is only $1 billion shy of the FY 2014 record level.
- New reforms have helped India jump 30 places to reach an overall ranking of 100 in the World Bank’s Ease of Doing Business Report 2018
4. Largest growing unmet trade finance gap $105 billion
- Due to tighter banking regulations, India accounts for the largest percentage of trade finance loan application rejections, approximately 7% globally, creating a trade finance gap of approximately $105 billion.