JPMorgan is planning a new frontier market bond index. The focus will be on local-currency debt. The move aims to meet growing investor demand for high-yield, riskier assets. In addition, Pakistan ranks among the top-weighted countries. The index will cover 20 to 25 economies across Asia, Africa, and other emerging markets.
This initiative comes 15 years after JPMorgan launched its hard-currency Next Generation Markets Index (NEXGEM). Moreover, it follows a weak US dollar. Meanwhile, markets in Argentina, Ecuador, and Uganda have rallied sharply. However, JPMorgan has declined to comment on the index so far.
Proposed Countries and Weightings
According to several money managers, the index will include Egypt, Vietnam, Kenya, Morocco, Kazakhstan, Pakistan, Nigeria, Sri Lanka, and Bangladesh as the heaviest weighted nations. In addition, Zambia’s inclusion is under review. The country recently issued larger local-currency bonds.
To ensure diversification, the index will cap country weightings. One source suggested no country will exceed 8 percent. Previously, a consultation paper proposed a 10 percent limit. Furthermore, the index will include only bonds of at least $250 million. This requirement raises questions about smaller issuers like Zambia.
Senior fund managers expect JPMorgan to release a formal index structure around June. Investors will then have a chance to provide final feedback. After that, the bank could officially launch the index later next year. However, the first announcement may come as early as March.
Rising Importance of Frontier Market Debt
Frontier market local-currency debt has trebled over the past decade. Today, it totals around $1 trillion, according to Neuberger Berman. Over the last eight years, frontier bonds outperformed JPMorgan’s mainstream emerging market index by 2.5 percentage points. They also exceeded returns on emerging market dollar bonds.
Experts say the new index could expand local-currency markets. Moreover, it could strengthen economic stability. The World Bank and IMF have long supported stronger local-currency bond markets. They argue it reduces debt crises caused by currency devaluation.
Frontier economies host one-fifth of the world’s population. Yet, they account for just 3.1 percent of global capital flows and less than 5 percent of global GDP. Furthermore, their population is expected to grow by 800 million over the next 25 years. This growth exceeds that of the rest of the world combined, making these economies increasingly important.
High Yields and Investor Opportunities
JPMorgan expects the index to offer roughly 400 basis points of yield pick-up over the GBI-EM benchmark. In addition, over 60 percent of the bonds will yield above 10 percent. Investors are also watching potential upgrades of Egypt and Nigeria to GBI-EM status. These changes could affect the index’s composition.
Overall, the frontier bond index could attract global investors seeking diversification and higher returns. By linking local markets across continents, JPMorgan aims to showcase the rising significance of frontier economies. Consequently, the index may reshape investment strategies and highlight emerging market potential.
