JPMorgan puts BD in frontier index

Bangladesh is set to gain greater visibility among international fixed-income investors as JPMorgan prepares to launch a new frontier-market local-currency government bond index, with the country among the markets expected to receive the benchmark’s maximum 8 per cent weighting.

The long-awaited GBI-EM Edge index, due to be launched by the end of September, will track nearly $330 billion in local-currency government debt across 26 of the world’s fastest-growing frontier economies, according to a JPMorgan note to investors seen by Reuters.

Bangladesh will be grouped with Egypt, Vietnam, Morocco, Kazakhstan, Pakistan, Nigeria and Sri Lanka among the countries expected to have the largest weightings.

Many of these markets have recorded strong rallies in recent years following periods of economic or financial stress.

The new index comes nearly two decades after JPMorgan launched its hard-currency NEXGEM frontier index.

Its introduction reflects growing investor interest in higher-yielding frontier-market debt and could increase international attention towards local-currency bond markets.

The countries included in the index are Albania, Angola, Bangladesh, Botswana, Ivory Coast, the Dominican Republic, Egypt, Georgia, Ghana, Jamaica, Jordan, Kazakhstan, Kenya, Morocco, Namibia, Niger, Nigeria, Pakistan, Paraguay, Senegal, Sri Lanka, Tunisia, Uganda, Uzbekistan, Vietnam and Zambia.

The World Bank estimates that frontier economies account for about one-fifth of the global population but attract only 3.1 per cent of global capital flows and contribute less than 5 per cent of global GDP.

Their demographic importance is expected to grow significantly. The populations of these economies are projected to increase by about 800 million over the next 25 years, more than the increase expected in the rest of the world combined, according to the World Bank.

Economists see the expansion of local-currency bond markets as particularly important because it can reduce governments’ dependence on foreign-currency borrowing.

When domestic currencies fall sharply, countries with large dollar-denominated debts can face difficulties servicing those obligations.

The World Bank and IMF have long advocated deeper local-currency debt markets for this reason.

Last week, Angola’s finance minister said the prospect of inclusion in the new index was among the factors behind the country’s decision to open its $18.6 billion domestic bond market more widely.

Higher Yield, Greater Exposure
JPMorgan has been developing the index for several years in response to increasing investor demand for higher-yielding debt, which has outperformed some other fixed-income markets.

Under the final methodology, only bonds with a minimum value of $250 million equivalent will qualify.

Eligible securities must have at least 2.5 years remaining to maturity, while the weighting of any individual country will be capped at 8 per cent.

African markets will account for almost 45 per cent of the index. Frontier Asia, led mainly by Vietnam, Kazakhstan, Pakistan and Bangladesh, will represent nearly one-third. All four are expected to carry the maximum 8 per cent weighting.

Thomas Christiansen, head of emerging-market fixed income at fund manager UBP in London, said the index reflected the growing appeal of frontier-market investment.

“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.”

The launch could have wider implications for the countries included in the benchmark.

International investors often allocate funds towards securities included in major bond indexes, meaning inclusion can improve market visibility and potentially attract additional portfolio investment.

FTSE Russell has operated a comparable frontier-market index since 2021. JPMorgan’s benchmarks, however, are particularly influential among emerging-market fund managers, who also use them to assess investment performance.

Tradable local-currency emerging-market debt is estimated to have tripled over the past decade to around $1 trillion. The new GBI-EM Edge will cover almost $330 billion of that market.

The index has a nominal yield of about 10.4 per cent, roughly 440 basis points above the mainstream emerging-market local-currency index.

Back-testing indicates that its annualised returns would have been 1.2 percentage points higher over the past nine years.

Some investors had earlier feared that the $250 million minimum bond-size requirement could exclude countries such as Zambia.

However, Zambia’s recent efforts to increase the size of its domestic bonds have enabled it to qualify.

“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.”