LTP Trade Finance IndexÖ - May / June performance update

The LTP Trade Finance IndexÖ - the independent total return index covering the trade finance asset class - delivered a steady performance during May and June. With US Dollar interest rates virtually static, capital returns were notable by their absence, leaving trade finance investors almost wholly reliant upon interest accrual. Yet investors should note that these low key total returns disguised mounting turbulence, as Brazil's problems begin to affect the wider market.

US Dollar interest rates (LIBOR) held steady in May, and fell by just 3 basis points in June. Whilst some commentators expect currency weakness to force the US Federal Reserve to raise interest rates sooner rather than later, this is hardly guaranteed. Mr Greenspan and the FOMC are likely to hold off a while longer, given the need to nurture the still-tentative economic recovery  and foster stability in the equity markets.

Trade finance credit margins have proved far more volatile during the May/June period, which - in keeping with the spirit of the soccer World Cup - was a game of two halves. May was relatively quiet, modest falls in credit margins across a handful of country risks (including Colombia, Russia, Indonesia, and Thailand) helping to trim the overall Index credit margin by 5 basis points, to 168 basis points over LIBOR. June was anything but quiet however, as Brazil fell foul of a collapse in investor confidence. The Index credit margin leapt up by 11 basis points to 179, its highest level since the turn of the year.

June's events deserve closer investigation. The Index credit margin gained a recent peak at 214 basis points in December 2001, driven wider by the slow-motion collapse of Argentina. Since that high point the margin has trended downward, reflecting a combination of factors, some technical (Argentina's lower Index weighting post-default) and some fundamental (improving credit perspectives in a number of important trade finance jurisdictions, including Korea, China, and Russia). Indeed, this analyst expected the overall Index margin to continue to tighten over the course of 2002, given the benign outlook for the abovementioned countries - and a better than even chance of recovery for former market stalwart Turkey. We noted in our last Index roundup however that Brazil looked vulnerable as the equity, bond and currency markets became fixated on the Presidential election campaign, and this has now spilled over to the trade finance market, with credit margins widening appreciably. With market sentiment having moved so strongly against Brazil - and, partly by association, and partly due to its own political and banking sector problems, Turkey - we cannot be confident of a quick return to stability.

The following table breaks down performance between capital appreciation and interest accrual - (note that, because of compounding effects, the constituents may not sum to the total).

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