JPMorgan Chase & Co. evaluates changes to its widely tracked benchmark for emerging-market bonds that could reduce the impact of some of the biggest sovereign debt issuers including China and India.
Bloomberg has reviewed documents that show the Wall Street Bank has proposed lowering from 10% to 8.5% the maximum weighting of individual countries within its GBI-EM Global Diversified Index.
This flagship index is used to benchmark over $200 billion of funds and tracks local currency sovereign bonds from developing countries.
A possible reduction in the weighting of major issuers such as China and India may allow smaller or higher yielding emerging market economies to gain greater representation, which could lead to higher yields and risks in the benchmark.
JPMorgan has actively sought client feedback while the change is still being discussed and not yet finalized.
The bank has made similar adjustments in the previous.
In a previous consultation, last year, it was proposed to change the methodology in order to reduce China’s index percentage down to around 6%. This proposal was ultimately withdrawn.
Potential winners and losers of a shifted allocation
If implemented, these changes would reduce the weightings of the largest issuers of bonds in the emerging markets universe.
China, India Indonesia, Mexico and Malaysia are all included. Bloomberg reports that countries like Brazil, South Africa and Poland, as well as Colombia, stand to benefit the most from this reallocation.
JPMorgan appears to want greater diversification of its benchmark for emerging markets by reducing the cap.
A change in composition could cause investment flows to be redirected, especially from passive funds that closely track the index.
Reallocation could also increase returns for investors, by increasing exposure to countries with higher interest rates. However, this would come with higher credit and currency risks.
JPMorgan declined to comment.
New frontier markets index
JPMorgan also considers expanding its offering with a new frontier local market index.
The proposed measure would cover 21 markets and include debt denominated 20 different currencies.
According to documents, the index would include approximately $344 billion of eligible bonds spread across 521 securities.
This move seems to be part JPMorgan’s larger effort to provide a more targeted exposure to the diverse and changing spectrum of developing economies.
Asset managers rely on benchmarks to help them manage their portfolios as interest in frontier markets and emerging markets increases.
JPMorgan will add Chinese and Indian bonds to its indexes by 2020 and 2024 respectively.
The weightings of these countries would be revised to reflect the changing dynamics of the market and investor sentiment towards geopolitical and economic developments as well as monetary and monetary developments.
JPMorgan’s proposed change could have a significant impact on the emerging-market debt investing landscape, even though no final decisions have yet been made.
This post JPMorgan plans to reduce China and India weights on EM Bond Index: Report may be modified as new updates unfold
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