GLOBAL MARKETS GREETED BY POLITICAL SHAKEUPS

Rubin Announces Resignation as US Treasury Secretary; Yeltsin Fires Prime Minister

Announcements of major changes in the governments of the Russia and the United States greeted global markets Wednesday, May 12, 1999. Boris Yeltsin's decision to fire Prime Minister Yevgeny Primakov caused a trading halt on the Moscow stock exchange and sent the dollar higher against world currencies. But both the dollar's gain and the Russian stock slide were quickly overshadowed by news of Robert Rubin's resignation as U.S. Treasury Secretary.
Among SEI's subadvisers, U.S. bond managers greeted Rubin's resignation with a yawn while the SEI International Fixed Income Fund will be taking a more defensive stance against the dollar.

Deputy Treasury Secretary Lawrence Summers is expected to be nominated to succeed Rubin as Secretary. Summers has worked closely with Rubin on international economic policy.

The consensus view of SEI's subadvisers to the U.S. Core Fixed Income Fund was that Rubin's resignation was not earth shattering. Summers is well thought of, although he is not considered as personable or political as Rubin. A known quantity to the markets, he is expected to continue Rubin's approach on the key issues such as trade conditions, bank reform and relations with the International Monetary Fund and World Bank so policy changes are not expected. Scott Grannis, chief economist for Western Asset Management noted that Rubin's resignation has been rumored for so long that the news today could turn out being a positive since it ends the uncertainty about his replacement.

Ken Windheim of Strategic Fixed Income, L.P. (subadviser to the International Fixed Income Fund), however, took a more cautionary stance and believes that the news will ultimately prove a negative for the dollar. While he expects Summers to be approved by Congress, the ride could be choppy short-term. Windheim notes the confirmation hearing could be protracted, as many members of Congress still believe Summers mislead them on magnitude of the Mexican peso crisis and bailout in 1994-1995.

Longer-term, Windheim is skeptical that that Summers will have the same commitment as Rubin to maintain a strong dollar policy. Further clues will be evident in Summers initial statements.

Preemptive Strike By Yeltsin

Boris Yeltsin's decision to fire Prime Minister Yevgeny Primakov and virtually all of his cabinet of ministers is being viewed as political gamesmanship, coming as it did days ahead of the scheduled start of impeachment proceedings against Yeltsin.

Local markets greeted the news poorly with the Moscow stock exchange halting trading after falling by 16% and the yield on a 2-year Eurobond jumping nearly 12% to 52%. The ruble fell by more than 3% against the dollar. As a result of the dismissals, needed funding from the IMF is questionable which could precipitate another default by the government.

As of May 7, SEI's Emerging Debt Fund held a 0.7% overweight to Russian bonds (6.4% vs. 5.7%). SEI's overall weight to Russia was down sharply from our 5.7% overweight at year-end. Jim Craige, portfolio manager at subadviser Salmon Brothers Asset Management, adjusted his weighting after a late March visit to Moscow. Concerned about Russia's willingness to repay Soviet era debt and unsure whether the country would receive all of its promised loans from the IMF, Salomon grew less confident in its Russian position.

The Emerging Markets Equity Fund is slightly underweight Russia and Eastern Europe and should benefit relative to the benchmark from the slide in Russian stocks.