JPMorgan is set to launch its new "GBI-EM Edge" frontier market local-currency government bond index by the end of September. This new benchmark will track approximately $330 billion of debt across 26 of the world's fastest-growing economies, providing investors with increased visibility into these markets.
The index has specific eligibility criteria: bonds must have a minimum value of $250 million equivalent and at least 2.5 years remaining to maturity. To ensure diversification, the maximum weighting any single country can hold in the index is capped at 8%. The index's nominal yield is projected to be around 10.4%, which is approximately 440 basis points higher than JPMorgan's mainstream emerging-market local-currency index, reflecting the higher risks and potential returns of frontier markets.
African countries are expected to account for a significant portion of the index, making up almost 45% of its total composition. Key African constituents are anticipated to include Egypt, Morocco, Nigeria, Angola, Zambia, Kenya, and Namibia. "Frontier Asia," comprising countries like Vietnam, Kazakhstan, Pakistan, and Bangladesh, will represent nearly one-third of the index, with these four Asian nations expected to receive the maximum 8% weighting. Bangladesh, for instance, is set to receive the benchmark’s maximum 8% weighting.
The launch of this index is seen as a significant development for these frontier economies. It aims to reduce their dependence on foreign-currency borrowing by encouraging the growth of local-currency bond markets. For example, Angola’s decision to open its $18.6 billion domestic bond market more widely was partly influenced by the prospect of inclusion in this new index. While the index offers increased visibility and a reference point for global investors, it also highlights the considerable market risks, including currency volatility, inflation, and liquidity issues associated with these markets.
