LTP Trade Finance IndexÖ - July 02 performance update

The LTP Trade Finance IndexÖ - the independent total return index covering the trade finance asset class - delivered a steady performance in July amidst the turmoil afflicting the global equity markets. Trade finance investments have not escaped completely unscathed: aggregate credit margins edged wider last month, but the asset class has once again provided compelling evidence of its stability in crisis situations.

The Index credit margin increased by 12 basis points (to stand at 191 basis points over LIBOR) in July, but the overall total return remained steady at 0.43% for the month. US Dollar LIBOR eased slightly as the markets began to recognise that - with the Dow Jones hard hit and the US recovery still far from entrenched - the FOMC may cut rates further.

Global trade finance investors will hardly be surprised to hear that Brazil and Turkey shared the responsibility for driving the Index credit margin wider. Brazil provided the key impetus in June, and its country margin widened again in July as market-friendly candidate Serra continued to languish in third place in the polls. Brazil is experiencing a severe credit crunch at present, a satisfactory resolution of which will require skilful handling by the IMF. Yet Brazil's problems were eclipsed in July as the most recent Turkish crisis prompted a sharp increase in the country risk premium on trade-related paper. Lame duck Prime Minister Ecevit finally bowed to the inevitable and called fresh elections, eighteen months ahead of schedule. The political situation in Turkey is especially fluid, incorporating as it does an Islamist party which is popular with the electorate (but not with the Military), and a brand new centrist party campaigning on a pro-EU and pro-reform platform. In the meantime, US political and military ambitions in the Middle East continue to underpin support for Turkey as a key strategic ally.

The Index credit margin remains 23 basis points off its most recent peak (214 basis points in December 2001), but with further uncertainty ahead in both Brazil and Turkey we can hardly rule out another upward move in August. Risk-averse investors can still find good investment opportunities however, in both stable, investment grade markets (such as South Korea, and China) and in the higher yield but improving markets (such as Russia).

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).