JPMorgan Chase & Co. is considering changes to its widely tracked emerging-market bond benchmark, which could lead to a reduction in the influence of major sovereign debt issuers like China and India. The Wall Street bank has been actively seeking client feedback on proposed amendments to its GBI-EM Global Diversified index. This flagship index serves as a benchmark for over $200 billion in funds and tracks local-currency sovereign bonds from developing nations.
The potential adjustments involve lowering the maximum weight of individual countries in the GBI-EM Global Diversified index from 10% to 8.5%. While these changes are still under consultation and not yet finalized, JPMorgan has explored similar adjustments in the past. A previous consultation considered a methodology change that would have cut China's index share to around 6%, but this proposal was eventually withdrawn.
If implemented, the proposed changes would reduce the index weightings of the largest bond issuers in the emerging market universe, including China, India, Indonesia, Mexico, and Malaysia. Conversely, countries like Brazil, South Africa, Poland, and Colombia stand to gain the most from the reallocation. By reducing the cap on individual countries, JPMorgan's goal appears to be greater diversification across its emerging-market benchmark. A shift in composition could redirect investment flows, particularly from passive funds that track the index closely.
The weighting reduction will divert investor flows from countries such as China and India towards smaller nations. A potential reduction in the weight of major issuers like China and India could allow smaller or higher-yielding emerging market economies to gain more representation, which may lead to higher overall yields and risk in the benchmark. This adjustment could result in an increased average yield for the benchmark, as countries with higher interest rates would receive larger representation. While elevated yields typically indicate higher risks, they also present opportunities for increased returns.
JPMorgan's index is the main benchmark for developing-nation debt funds, and changes to its composition can affect global investment flows. Chinese bonds were phased into JPMorgan's indexes in 2020, while Indian debt was added last year. In addition to these adjustments, JPMorgan is also launching a new frontier local markets index covering 21 countries and $344 billion in debt. They are also considering new additions like Saudi Arabia and the Philippines.
