TRADE FINANCE INDEX: Lifting slightly

The LTP Trade Finance Index from LTP Risk Management gives its January performance update. The year opened with a rise in the Index, although overall since October, monthly returns have remained weak.

The LTP Trade Finance Index™ - the independent total return index covering the trade finance asset class - delivered an improved performance in the opening month of 2002, generating a total return of 0.36%. Yet overall monthly returns have remained relatively weak since October 2001, the long series of capital gains generated by regular reductions in US dollar LIBOR having come to an end. Indeed, with US dollar LIBOR expected to trend upwards in 2002 trade finance investors will be looking for a fall in credit margins to generate capital gains this year, while at the same time hedging their funding costs.

A quick glance at the graph shows that the average credit margin (across the 21 countries which comprise the Index) did indeed tighten last month, albeit by just four basis points. It should be noted that the graph has been skewed by the rebalancing of the Index as at YE 2001, implemented following the periodic review of its composition in line with changes in World Trade Organisation data and secondary market activity. The rebalanced portfolio (full details of which can be found at www.ltp.com) delivered a sharply lower average credit margin as at December 31, 2001, reflecting not least a reduced Argentine weighting. Rather than restate the historic Index credit margin data to reflect the newly rebalanced portfolio, we follow industry practice by implementing a one-off adjustment to the average credit margin (equating to 18 basis points) as at the date of rebalancing.

Going forward, events in Argentina will exert far less influence over the Index, given its reduced portfolio share, although the performance of Korea, China, Brazil and Turkey will continue to drive overall returns. LTP’s research team forecasts reductions in the one-year credit margin in each of these four key countries over the course of 2002: indeed, if our country-by-country forecasts are achieved in full, the average credit margin will reduce by about 40 basis points by December.

Looking more closely at the January Index performance, an increase US dollar interest rates (up by four basis points during the calendar month) neatly cancelled the four basis point reduction in the average credit margin to deliver a zero capital return. The 0.36% total monthly return was generated by interest accrual.

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).

	Capital	Interest	Total
February 2001	0.11	0.48	0.60
March	0.08	0.51	0.59
April	0.06	0.52	0.58
May	0.49	0.49	0.99
June	0.13	0.43	0.56
July	0.24	0.47	0.71
August	0.31	0.44	0.75
September	0.87	0.36	1.23
October	0.07	0.36	0.43
November	(0.26)	0.35	0.09
December	(0.14)	0.37	0.23
January 2002	0.00	0.35	0.36

Further information on the LTP Trade Finance Index can be obtained by contacting:

Trevor Utting, Head of Research, LTP Risk Management

Tel: +44 20 7292 7970

Email: Trevor.Utting@ltp.com

Patrick Bayliss

Tel: +44 20 7292 7963

Email: Patrick.Bayliss@ltp.com