Steep monthly rise

The LTP Trade Finance Index™ rose 0.49% in May. This return is the largest monthly rise in 2003 and brings the total return for the year to date to 1.73%. This compares to the same period in 2002, when the index rose 1.93% – in both cases, demonstrating the consistent positive returns that can be obtained from a portfolio of trade-finance assets.

At the end of May, the index yielded 3.05% p.a. (Libor plus a margin of 1.84%). This running yield equates to approximately 0.25% per month, so roughly half of the monthly return is a result of interest accrual. The remainder of the return in May consists of 0.15% from a reduction in underlying Libor rates and 0.10% from a reduction in the overall credit margin across the countries represented by the index.

Over the month, the average credit margin in the EMEA region contracted by 0.18%, with an improvement in credit margins in Russia, Romania and Turkey. In Latin America, Brazil continued to tighten, with the average credit margin in the Latin American sub-index tightening by 0.14%. This sub-index continues to yield significantly more than the other regions, making Latin America the best-performing area for trade-finance assets in terms of total return. Asia has seen the least movement this month, with low yields and little change in margins during May.

On a risk/return basis, the three regions have behaved very differently so far this year. EMEA has been the most volatile area, followed by Latin America and then Asia. However, total return for the EMEA region has been substantially lower than that for Latin America. In fact, Latin America has accounted for more than 60% of the total return of the index so far this year.

The following chart shows the year-to-date performance for each sub-index against the annualised risk (risk increases as you go from the left to the right of the chart, while total return increases as you go from the bottom to the top). Interestingly, if the annualised risk is divided by the total return, EMEA and Asia show the same risk/reward ratio, while Latin America is strongly ahead on this risk/reward measure.

Further information on the LTP Trade Finance Index™ can be obtained by contacting Patrick Bayliss on Tel: (+44) 020 8899 6814.