Emerging Markets

The rise of emerging markets-debt indexes

In the 1990s emerging markets-debt indexes were limited to external US-dollar-denominated sovereign debt but as interest in the asset class has increased so has the breadth and depth of available indexes.

The JP Morgan family of emerging market-bond indexes contains some of the most widely used by investors.

In the 2000s JP Morgan expanded its coverage of emerging markets debt and launched local-currency Government Bond Index Emerging Market Global. This was followed by an emerging-market corporate bond.

Both local and corporate bond markets have grown strongly in recent times.

JP Morgan reports that as of the start of this year the underlying market value of its Government Bond Index Emerging Market Global Diversified (GBI-EM Global Diversified) was $864 billion.

This compares to $276 billion for its long-established external hard currency benchmark Emerging Market Bond Index Global Diversified (EMBI Global Diversified). The most widely used of its corporate bond indexes, the Corporate Emerging Market Bond Index Broad Diversified, has a market value of $213 billion.

In the two government bond indexes, the hard-currency index is distinguished by the greater number of countries it covers.

The EMBI G Div covers 44 countries, while the GBI-EM Global Diversified covers just 14 countries issuing debt in their own currencies.

Relative weights

Securities must be accessible for foreign investors, resulting in both India and China not being included in JP Morgan’s local currency index due to restrictions on foreign investment.

JP Morgan’s Corporate Emerging Market Bond Index Broad Diversified contained 336 individual issuers as of the start of 2012.

Of the three indexes, the corporate index has the greatest exposure to Asia, with a 40-per-cent weight in the index to Asian corporate securities. This compares with 29 per cent and 19 per cent for the GBI-EM Global Diversified and the EMBI Global Diversified, respectively.

Of the two sovereign bond indexes, there is not a great deal of difference in terms of regional coverage. The local-currency index contains marginally more emerging market Asia and slightly less Latin America relative to the hard-currency index.

The indexes, while broad, capture a slice of the total fixed-income universe.

By 2011 there were more than 70 countries issuing US-dollar-denominated sovereign debt and more than 45 countries issuing debt in their own currency.

As more countries issue investable debt in both local and hard currency, the number of nations included in the index is expected to increase.

Similarly, the local-currency index may include other forms of debt beyond government bonds as companies start to issue debt in their own currency in reaction to a growing local-investor base.

The corporate bond index has also shown traits of increasing diversity.

There has been a marked increase in the regional diversity in the index with corporate issuers from emerging Europe, Africa and the Middle East now making up more than 32 per cent of CEM BI Broad Diversified as of December 31 2011.

While banks remain the largest sector of the index, energy and telecom companies have expanded their market share in recent years.

 

JP Morgan emerging market bond indexes

Yield Duration (years) Credit quality
EMBI Global Diversified 5.69% 7.1 Baa3/BBB-
Corporate EM Bond Index
Broad Diversified
5.8% 5.2 Baa2/BBB
Government Bond Index EM
Global Diversified
6.23% 4.6 Baa2/BBB

 

Source: JP Morgan, January 2012

 

 

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