JPMorgan is close to finalising plans for a new index tracking frontier market local currency bonds, according to investors who have been consulted on the proposal, as the bank moves to meet rising demand for higher-yielding and more diversified debt.
The development comes around 15 years after the Wall Street bank launched its hard-currency NEXGEM frontier index and coincides with a prolonged slump in the U.S. dollar, alongside sharp rallies in markets such as Argentina, Ecuador, and Uganda.
JPMorgan declined to comment on the plans.
Six senior money managers who spoke to Reuters on condition of anonymity said discussions with the bank reached an advanced stage in the second half of last year. According to three of them, the proposed index is expected to include between 20 and 25 countries, with Egypt, Vietnam, Kenya, Morocco, Kazakhstan, Pakistan, Nigeria, Sri Lanka, and Bangladesh carrying the largest weightings.
One source said the index would cap individual country weightings at 8%, while another said an earlier consultation document proposed a 10% limit. The index is also expected to include only bonds with a minimum size of $250 million (or equivalent), a condition that has raised concerns around Zambia. Many investors want Zambia included, but the country has historically issued smaller local-currency bonds.
“We expect they will give us a formal structure for the index around June, with the opportunity to make some final comments,” one senior fund manager said. “They are then likely to formally launch the index next year.”
Another fund manager suggested an initial announcement could come as early as the end of March, potentially bringing the formal launch forward.
FTSE Russell already introduced a similar index in 2021, but JPMorgan’s indices tend to be more widely used by emerging market investors as benchmarks for fund construction and performance measurement.
According to analysis by Neuberger Berman, tradable frontier market local-currency debt has tripled over the past decade to around $1 trillion. Over the last eight years, frontier market local FX debt has outperformed JPMorgan’s mainstream emerging market local currency index by nearly 2.5 percentage points and has also beaten the emerging market dollar bond index.
“We see that as confirmation that frontier market growth and broader economic performance have been systematically underpriced,” said Rob Drijkoningen of Neuberger Berman.
World Bank data show that frontier economies account for around one-fifth of the global population but receive just 3.1% of global capital flows and contribute less than 5% of global GDP. Their populations are projected to grow by another 800 million over the next 25 years—more than the rest of the world combined—suggesting a growing role in global economic growth.
Analysts expect JPMorgan’s new index to help deepen local currency bond markets, a long-standing goal of the World Bank and IMF aimed at reducing the risk of debt crises triggered by currency collapses that make hard-currency debt unpayable.
Interest in frontier market debt has also increased as investors reassess traditionally “safe” developed-market assets and seek opportunities elsewhere. Several investors raised fresh questions about Zambia’s eligibility, noting that the country had only recently issued a local-currency bond above the $250 million threshold, raising hopes it could now qualify.
Another eligibility rule mirrors JPMorgan’s GBI-EM index for major emerging markets: bonds included must have more than 2.5 years remaining to maturity.
In September, JPMorgan estimated the new index would offer a yield pickup of 400 basis points or more over the GBI-EM, with more than 60% of its constituents yielding above 10%.
Some investors also pointed to the possibility that heavily weighted countries such as Egypt or Nigeria could be promoted to the GBI-EM index in future years, potentially altering the frontier index’s composition.
“It will be important to nail that down,” one senior fund manager said.
