JPMorgan to launch long-awaited 'frontier' local currency debt index

[LONDON] JPMorgan is set to launch its long-awaited “frontier” market local-currency government bond index by the end of September, giving investors a new benchmark for nearly US$330 billion of debt across some of the world’s fastest-growing economies.

Coming almost 20 years after its hard-currency NEXGEM frontier index, the Wall Street bank’s new “GBI-EM Edge” benchmark will cover bonds from 26 countries, a JPMorgan note to investors seen by Reuters showed.

Those set to have the biggest weightings include Egypt, Vietnam, Morocco, Kazakhstan, Bangladesh, Pakistan, Nigeria and Sri Lanka, many of which have enjoyed strong market rallies in recent years after crises.

The World Bank says frontier economies are home to a fifth of the world’s population but account for just 3.1 per cent of global capital flows and less than 5 per cent of global GDP.

Their populations, however, are expected to increase by 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.

Economists also see the new debt indexes helping expand local-currency markets, something long-championed by the World Bank and IMF as a way to reduce debt crises caused when currency crashes leave governments unable to pay dollar debt.

Last week, the finance minister of Angola, a country in the new index, said it was one of the reasons it was opening up its US$18.6 billion domestic bond market more widely.

JPMorgan has been working on the new index for years in response to a growing appetite among investors for more high-yielding debt, which has been outperforming other markets.

Its details on Monday showed it will only include bonds of US$250 million equivalent or above. They must also have at least 2.5 years left to maturity, while the maximum “weighting” that any country can have in the index is capped at 8 per cent.

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African countries will account for almost 45 per cent of the index, while “Frontier Asia”, mainly Vietnam, Kazakhstan, Pakistan and Bangladesh, all of which will carry the maximum 8 per cent weightings, will make up nearly a third.

Thomas Christiansen, head of EM fixed income at fund manager UBP in London, said the index’s launch reflected the growth in frontier market investing.

“I don’t think this index would have been possible 10 years ago,” Christiansen said. “People are waking up to the fact that these markets are really interesting and help diversify portfolios.”

Bond indexes can impact the fortunes of developing economies as international investors often gravitate towards the bonds included in them.

FTSE Russell has had an equivalent index since 2021. JPMorgan indexes, however, are more prominent among emerging market money managers, who also use them to measure their own performance.

Analysts estimate that tradeable local-currency emerging market debt has trebled over the last decade to around US$1 trillion.

The new GBI-EM Edge will track almost US$330 billion of that total. Its nominal yield of almost 10.4 per cent is roughly 440 basis points more than the mainstream EM local currency index.

Back-testing also shows its returns would have been 1.2 percentage points higher on an annualised basis over the last nine years.

Some investors had feared the US$250 million minimum requirement would have seen the likes of Zambia excluded from the index, but the country’s efforts to increase the size of its bonds in recent months means it has made the cut.

“Many of these markets look a lot like the core emerging markets did in the early 2000s,” JPMorgan said in its note detailing the index. “High nominal carry, improving market plumbing, and periodic bouts of volatility.” REUTERS