By Marc Jones
London — JPMorgan is finalising plans for an index to track local currency bonds of frontier markets, according to investors consulted on the details, as the bank looks to satisfy a growing appetite for riskier and more diversified high-yield debt.
The move, which comes 15 years after the Wall Street bank launched its hard-currency NextGEM frontier index, coincides with the year-long slump in the dollar and some extraordinary rallies recently in markets such as Argentina, Ecuador and Uganda.
JPMorgan declined to comment on the plans. Six money managers who spoke 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.
Weighting restriction
According to one source, a limit would restrict would restrict a country’s weighting to a maximum of 8%. A second source said an earlier consultation document had a proposed 10% limit.
Also, the index will only include bonds of at least $250m equivalent, though that has raised issues around Zambia, which many investors 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.
Tradeable debt surges
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 tradeable local-currency debt has trebled over the last decade to about $1-trillion.
It also calculates that frontier market local currency debt had outperformed JPMorgan’s mainstream emerging market local currency index by almost 2.5 percentage points over the past eight years and also outstripped the emerging markets dollar bond index.
“We see that as a confirmation that frontier market growth, and general economic performance, has been systematically underpriced,” said Neuberger Berman MD Rob Drijkoningen.
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 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.
Analysts expect JPMorgan’s new debt index will help expand local currency bond markets — 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.
Diversity in adversity
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-$250m local-currency bonds.
Zambia 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 that it will make the cut.
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 about 400 basis points or more of “pick-up” in yield over the GBI-EM, with more than 60% of the index constituents yielding more than 10%.
A potential promotion of top-weighted countries such as Egypt and Nigeria to the GBI-EM index in coming years is another issue that could alter the index’s make-up, possibly putting off some investors.
“It will be important to nail that down,” one senior fund manager said.
