JPMorgan is set to become a pioneer in emerging-market fixed income by launching its long-delayed frontier local-currency government bond index ahead of the end of September. The new index, known as GBI-EM Edge, will give investors a transparent index to follow close to $330 billion of sovereign debt in local currencies issued by 26 weaker faster-growing nations.
The change comes nearly 20 years after the bank first launched its hard-currency frontier index, NEXGEM, and this time it is domestic bonds, rather than dollar- or euro-denominated debt. The new index is based on nearly two years of feedback from investors who have indicated growing demand for higher-yielding assets outside the more developed emerging markets.
Our initial universe will consist of 26 countries. The countries with the largest anticipated weights will be Egypt Vietnam Morocco, Kazakhstan Bangladesh Pakistan, Nigeria and Sri Lanka. Many of these markets enjoyed strong rebounds after a period of stress. Country weights will be limited to 8% to prevent the portfolio from being overly influenced by any one market. To be eligible, bonds should have a minimum outstanding amount of $250 million and be at least 2.5 years to maturity.
Africa would be expected to have a standout presence. African markets are estimated to constitute close to 45 percent of the index. Frontier Asiacomprising Vietnam Kazakhstan Pakistan and Bangladeshcould be about a third of it. Nigeria’s inclusion is notably. It is slated to have a weightage of nearly 7.4 percent, a measure of its re-engagement with a local-currency-base JPMorgan benchmark for the first time post its exit from a separate flagship index 10 years ago.
These figures are alluring on paper. The GBI-EM Edge should generate a nominal yield of about 10.4 percent, approximately 440 basis points more than JPMorgan’s standard emerging-market local-currency index. Back-testing shows that the frontier basket would have provided annualised returns around 1.2 percentage points above that of the more diverse emerging-market index over the past nine years. And that extra yield comes with the traditional frontier-market attributes: thinner markets, choppier currencies, more reliance on politics and policies.
For the countries in question, inclusion can makedata includes. For most companies, being included can make a difference. Many firms from emerging markets have enjoyed successive ratings upgrades. Otherwise sold to active and passive investors in the benchmark index, they could benefit from incremental foreign buying as they re-balance or seek to outperform, over time deepening local markets, broadening the investor base and even bringing down funding costs for municipal governments issuing debt in local currency. Economists have long claimed that more robust domestic debt markets help mitigate the risk of currency mismatches that has precipitated recent debt crises data.
JPMorgan’s move is indicative of a trend which is happening in fixed income investing. Following the end of the trend in the world’s largest and most liquid emerging markets with the narrowing in yields, investors are increasingly seeking diversification and income elsewhere.
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