LONDON: JPMorgan is finalising plans for a new index to track frontier market local currency bonds, investors consulted on the details told Reuters, as the bank looks to satisfy a growing appetite for riskier and more diversified high-yield debt.
Six leading money managers who spoke to Reuters on condition of anonymity said the bank’s engagements with them reached an advanced stage in the second half of last year.
The proposed index includes 20 to 25 countries, with Egypt, Vietnam, Kenya, Morocco, Kazakhstan, Pakistan, Nigeria, Sri Lanka and Bangladesh having the largest “weightings”, three of the managers said.
The move, which comes 15 years after the Wall Street bank launched its hard-currency NEXGEM frontier index, coincides with the year-long slump in the dollar and some extraordinary recent rallies in markets like Argentina, Ecuador and Uganda.
JPMorgan declined to comment on the plans.
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Bond sizes and caps on weighting
According to one source, there would be a limit that means no country has a weighting of more than 8%. A second source said an earlier consultation document had a proposed 10% limit.
It is also set to only include bonds of at least $250 million equivalent, although that has raised issues around Zambia, which many would like to see included but has traditionally only sold smaller individual bonds.
“We expect they (JPMorgan) will give us a formal structure for the index around June with the opportunity to make some final comments,” said one senior fund manager.
“They are then likely to formally launch (the index) next year, we think.”
Another senior fund manager said the initial announcement might be as early as the end of March, which could also bring the formal launch date forward.
Trillion dollar market
FTSE Russell has already had an equivalent index since 2021. JPMorgan’s versions, however, are more prominent among emerging market money managers, who effectively use them to compile their funds and measure their performance.
Analysis by Neuberger Berman estimates tradable local-currency debt has trebled over the last decade to around $1 trillion.
It also calculates that over the last eight years, frontier market local FX debt had outperformed JPMorgan’s mainstream emerging market local currency index by almost 2.5 percentage points, and also outstripped the EM dollar bond index.
“We see that as a confirmation that frontier market growth and general economic performance has been systematically underpriced,” Neuberger Berman’s Rob Drijkoningen said.
According to the World Bank, frontier economies are home to a fifth of the world’s population but account for just 3.1% of global capital flows and less than 5% of global GDP.
Their populations, however, are expected to increase by another 800 million over the next 25 years — more than the rest of the world combined – meaning they will play an increasingly important role in global economic growth.
Analysts expect JPMorgan’s new debt index to help expand local currency bond markets – something long-championed by the World Bank and IMF as a way to reduce the number of debt crises caused when currency crashes leave governments unable to pay hard-currency debt.
Zambia and eligibility requirements
The rising interest in frontier market debt also comes as shaken confidence in once-safe debt in the developed world pushes capital flows to other parts of the globe.
Three of the investors raised questions about Zambia, which until recently had only sold sub-$250 million local-currency bonds.
It was not in some of JPMorgan’s early outlines, the investors said, but the country has since issued at least one larger bond, raising hopes it will now make the cut.
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One eligibility requirement that mirrors JPMorgan’s GBI-EM index of major emerging economies is that included bonds will have more than 2.5 years of remaining maturity – the time before full repayment is due.
JPMorgan estimated in September the index will have approximately 400 basis points or more of “pick-up” in yield over the GBI-EM, with over 60% of the index constituents yielding more than 10%.
A potential promotion of top-weighted countries like Egypt and Nigeria to the GBI-EM index in coming years is another issue that could alter the index’s makeup, possibly putting off some investors.
“It will be important to nail that down,” one senior fund manager said.
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