LTP Trade Finance IndexÖ - September 02 performance update

The LTP Trade Finance IndexÖ - the independent total return index covering the trade finance asset class - delivered a lacklustre return in September, equivalent to just 0.38%. More strikingly however, the Index credit margin widened by another 10 basis points to 196 over LIBOR at September 30th, driven by events in Brazil. The "Brazil effect" has continued into the early part of October, pushing the Index credit margin out above 200 basis points to a 2002 high.

The outcome of the Brazilian elections may not have been resolved at the time of writing this, but the financial markets have delivered their verdict on leftist candidate Lula's strong showing in the first round of voting. Brazil's currency (and its bonds) have been hit hard once again, and JP Morgan's EMBI+ shows a credit spread on sovereign bonds above 20%. Understandably, the markets are primarily focused on the identity of Brazil's next President, although whoever emerges victorious will inherit a difficult situation, both political and economic. A President Lula would need to find a way to work with a largely conservative domestic legislature, and a conservative US administration, whilst a President Serra would need to find a way to repair the damaged PSDB-PFL alliance. More importantly, the winning candidate will face a fragile economy, in which the priorities must include compliance with the new IMF programme; the rebuilding of market confidence in Brazil's currency and bonds, and maintenance of the fiscal surplus - irrespective of pre-election pledges. Thanks to a heavy burden of debt - whether measured against GDP, or against exports - and a sluggish global economy, Brazil is walking a tightrope.

Brazil's problems outweighed more positive news elsewhere in the trade finance markets, due in part to its relatively significant weighting within the Index. Credit margins tightened in Russia, Turkey, Indonesia and China in September, reflecting improving credit fundamentals in all of those countries - with the possible exception of Turkey. With elections due in November Turkey's recent compliance with the IMF programme has perhaps been overlooked, but it is still too early to assume a steady recovery. Political uncertainties (both domestic and regional) need to be resolved before a sensible assessment can be made for the economy, and the banks working within it.

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).