Bond Index Makeover: JPMorgan Plots a Power Shift Away from Asia’s Giants

Image Source: Sarkari Pariksha

JPMorgan Chase & Co. is weighing a radical restructuring of its leading emerging-market bond index, with a plan to reduce the weightage of the biggest issuers—most significantly, China and India. The action would have far-reaching consequences for cross-border investment flows and the structure of emerging-market (EM) debt.

Key Highlights

Recommended Cap Reduction:

JPMorgan is soliciting client feedback on reducing the country cap in its GBI-EM Global Diversified Index from 10% to 8.5%. This would diminish the weightings of China and India, the index's largest constituents currently.

Broader Impact:

The realignment would also impact other major EM bond issuers such as Indonesia, Mexico, and Malaysia. Conversely, countries such as Brazil, South Africa, Poland, and Colombia could see their weights in the index increase.

Reasoning:

The action is intended to expand the index and bring in a wider cross-section of developing-nation debt, possibly increasing the average yield of the benchmark as more heavily weighted, higher-yielding, riskier nations are incorporated.

Market Reactions

The GBI-EM index has more than $200 billion of assets tracking behind it. Any reweighting of its composition has the power to cause substantial realignments of world capital, influencing currency markets as well as bond prices in the targeted countries.

Not Finalized

They are tentative proposals, and JPMorgan has not pledged to put them into effect. An analogous plan to reduce China's stake last year was shelved after talks.

Frontier Markets Index Preview: JPMorgan is also launching a new frontier local markets index covering $344 billion of debt in 21 markets and 20 currencies, evidence of more ambitious EM debt benchmarking ambitions.

Why It Matters

For Investors: A cap reduction would lead to higher yields but also higher risk, since the index would move towards countries with more volatile economies.
For China & India: Smaller index weights can lower foreign inflows into their bond markets and affect domestic financing conditions. For Other EMs: Smaller nations will be likely to gain from greater exposure and capital inflows.

Source: Bloomberg News, Economic Times, NDTV Profit