LTP Trade Finance IndexÖ - February performance update

The LTP Trade Finance IndexÖ - the independent total return index covering the trade finance asset class - continued its 2002 rally in February, generating a total return of 0.53%. This represents the best monthly return since September 2001, and the first positive capital return since October 2001.

As discussed in previous updates the market regards cuts in the US Dollar LIBOR rate as a thing of the past, leaving trade finance investors reliant upon cuts in the average credit margin to generate capital gains. Our country-by-country forecasts (published at the end of February on www.ltp.com) suggest that, overall, credit margins will indeed trend downwards in 2002, although investors may be wise to check that their funding costs are appropriately hedged.

A quick glance at the attached graph shows that the average credit margin (across the 21 countries which comprise the Index) tightened by 15 basis points last month, driven primarily by Turkey (10 basis points), Brazil, and Indonesia. Turkey - former mainstay of the market, but dangerously close to default in 2001 - is now reaping the benefit of economic orthodoxy (under its excellent Finance Minister Kemal Dervis) and its reinforced political importance as NATO ally and member of the coalition against terrorism. With the new IMF deal now signed investors can look forward to further reductions in credit margins as the year progresses. The potential for substantial gain is less apparent in Brazil and Korea, both key markets but both facing potentially difficult election campaigns. At the other end of the credit spectrum Indonesia may yet offer some interesting opportunities for those with intimate knowledge of this specialist market. In our view, credit events will prove crucial to portfolio allocation in all fixed income markets in 2002. Investors will need to keep a close watch on individual country prospects.

The Index returned a 21 basis point capital gain in February, accounted for by a slight reduction in US Dollar interest rates (down by 6 basis points during the calendar month) and a 15 basis point reduction in the average credit margin. Interest accrual generated another 0.32%, such that the portfolio yielded a total return of 0.53% for the month.

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).