Related News

Tariff pause ‘unlikely’ to reverse dramatic drop in LA port activity

HSBC launches tariff financing product for US importers

Trade finance banks in “wait and see” mode over Trump tariffs

Trade Leaders Interview: Enrique Rico, Santander

Tariff war set to shrink global trade, WTO warns

Funds have for years lamented a lack of investor enthusiasm for trade finance, or even awareness of the asset class. Then came a global trade war.  

US President Donald Trump’s threatened tariffs on key trading partners, and the steep levies on China he has already imposed, have sparked investor angst over trade finance assets, fund managers say, as well as prompting closer scrutiny and re-underwriting of portfolios that include direct exposure to US-China trade.  

“It’s impacted the companies that we fund, but it’s also impacted the sentiment of investors,” says Bos Smith, portfolio manager for US fund BroadRiver Asset Management’s trade finance strategy, which focuses on buying receivables of Asian suppliers to the US. 

Smith tells GTR investors are “in many cases are not terribly experienced with trade finance and had never been directly exposed to the asset class before investing in our products. With tariffs and trade wars now topping the news, they don’t know how to react”.  

Investors have questioned whether the fund should stop purchasing trade receivables until the situation has stabilised, but Smith says he is confident in the fund’s underwriting processes and the short-term nature of the assets.  

While import orders are down, the higher costs are driving up demand for trade finance, Smith says.  

“To date we have not struggled to keep capital deployed, but we are certainly considering the effect that a prolonged trade war could have on transaction volume.” 

Tobias Pfütze, co-founder of Originate Capital, a non-bank trade finance provider also specialising in US imports from Asia, says clients have been stockpiling goods to soften the blow from the tariffs. 

The short-term buying frenzy has fueled demand, he says, adding that many traders have been in the business a long time “so they don’t completely freak out” over tariffs. But in the medium-to-long term he says “it could lead to some bankruptcies” of suppliers that cannot cope with the levies.  

Pfütze argues the main cause of investors’ caution over exposure to trade is still the risk of fraud. Banks and smaller financiers have suffered bruising losses from deceptive borrowers, many of which were exposed during the Covid-19 pandemic.  

But partly as a result, some large banks have curtailed their trade finance activity, especially to SMEs, fuelling demand for trade finance lending from funds and other non-bank providers.  

Funds, which can be direct lenders or purchase assets on the secondary market, provide investors access to trade exposures and earn fees in the process. Many specialise in emerging market lending that large banks deem too costly or risky.  

“What we’re seeing today is an increased demand for capital,” says Ahmad Al-Sati, partner and portfolio manager at Gemcorp, which recently launched a commodities-focused trade finance fund.  

“People are more starved for capital today than we started the fund, which allows us to see more opportunities and more ideas out there than we had expected.” 

The short-term nature of many trade assets allows instruments to be re-priced relatively quickly to absorb heightened risk and inflation caused by tariffs, Al-Sati tells GTR. He says the fund’s focus on trade between emerging markets, so-called south-to-south flows, will help insulate it from current US-focused tariffs.  

The sentiment is echoed by US asset management giant Federated Hermes, which manages trade finance assets of around US$2bn across three funds, two of which are open to investors and one of which uses an allocation from the firm’s broader pool.  

“The news around tariffs is a shock to the system, but is it an existential threat to trade? It’s not,” says Kazaur Rahman, Federated Hermes’ trade finance portfolio manager.  

The US currently accounts for around 15% of global imports, he says, leaving a “large addressable market, which we can actually still provide financing to and invest in and earn our investors an attractive return”. 

Federated Hermes’ composite trade finance assets earned investors net returns of 8.24% in the last two years, according to a recent white paper, with a 10-year annualised return of 3.58%. Rahman says 60-80% of its trade and project finance investments are in emerging markets.  

South-to-south trade has been growing faster than other types of trade flows, the UN says in an April 16 report, noting it currently accounts for around a third of global trade. But developing countries face broader economic headwinds from tariffs because global investors are likely to seek safe havens, the report adds. 

A trade finance fund managed by Santander Alternative Investments has exited at least one investment heavily exposed to earlier US tariffs on Canada and Mexico, GTR previously reported.  

US tariffs on China are now at 145%, and Beijing’s retaliatory measures on US exports are only slightly lower. But more widespread pain could still be on the way; Trump has only paused tariffs of varying levels on top trading partners due to a market backlash, giving time for countries to seek negotiations with Washington.  

BroadRiver’s Smith says the tariffs will be a test that trade finance assets are likely to pass. “We see no reason to panic. But we are increasing the frequency of communications with clients and thankful to be in short-term assets.” 

“We are not expecting a run-up in trade finance default rates. To the contrary, we fully expect this period of turmoil to become a case study on the resiliency of the asset class.”