Uncertainty hangs over interest rates and bull market in bonds looks like coming to an end
As the spectre of higher interest rates begins to worry some fund managers,
NBAD, the biggest
Late last year, the
Like the EIIB-Rasmala venture, NBAD is also targeting a return of 4 per cent annually,
Trade finance is a form of intermediation for exporters and importers whereby banks or other financial institutions offer guarantees of payment including so-called letters of credit.
"It's a great asset class," said
"Trade finance is a multitrillion-dollar market. Before the banks had a stranglehold on it rather than asset management. But because banks are retrenching slightly because of their balance sheet, because of Basel III [capital requirements], some of these deals are not as attractive for them."
Together with NBAD's existing tailor-made trade finance solutions and the planned fund, investments in this business are expected to grow to
But now that interest rates are set to rise at some point in the near future, fixed income managers are seeking to extract sustainable yields from other asset classes, analysts say.
They are in agreement that it is a good bet to diversify fixed-income portfolios with trade finance, especially at a time when uncertainty hangs over interest rates and the decades-long bull market in bonds looks like it is coming to an end.
Analysts also say that fund managers are in a good position to get into the trade finance business because of Basel III industry regulations that are aimed at reining in the amount banks can both borrow and lend, creating opportunities for them to fund such transactions.
"It would provide a nice diversifying asset class and I am sure that there's going to be investors interested in that," said
"Whether it's retail or institutions that want exposure to that asset class, it's a good way to do it because the fixed costs of originating a deal like that are prohibitive to any investment exposure to the business. It's an interesting idea. Four per cent is pretty good at the moment. That's in line with some of the corporate bonds we're seeing in the GCC, and above sovereign yields."
"Trade finance is not a big part of the business of banks in the region but it is something that continues to command the attention of management, because as regional oil exporters become less reliant on hydrocarbons, trade finance will be a good long term business to be in."
Such funds, however, are geared towards sophisticated investors who can lock up large sums for at least 90 days, the time it typically takes for trade finance operations. And they are likely to continue to be offered exclusively to institutions and high net worth individuals.
"We're basically giving money to an exporter on day one, taking ownership of the product in between, waiting 90 days for it to reach its other port and getting the money back from the importer," said
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