JPMorgan is reportedly close to completing a new index which will track local-currency debt markets in frontier markets. The index will provide dedicated funds and passive investment products with a framework to invest in local-currency assets from frontier markets. The index will establish a clear benchmark which enables global investors and local governments to assess their costs for issuing bonds and setting prices.
The index will attract foreign investors to local bond markets by creating demand for domestic-currency bonds. The index will help issuers to reduce their borrowing expenses while extending their loan repayment terms. Investors gain from a professionally constructed index because it provides transparency about liquidity requirements and establishes specific rules for investing in frontier debt.
Investors in frontier markets face two major risks which include concentration risk and currency risk. Frontier markets exhibit two main challenges which include market volatility and limited secondary market trading abilities.
Market participants say JPMorgan’s initiative responds to better macroeconomic conditions which exist in specific frontier markets and to the fact that passive investment techniques now determine how investors access both emerging and developed debt markets. The distribution of benefits will depend on three factors which include index inclusion rules and rebalancing frequency and eligibility criteria. Local authorities should use this situation as a chance to develop their debt-market systems while they enhance transparency and implement effective macroeconomic strategies which will help them attract stable investment streams.
