INDEX
BENCHMARKS
FOR EMERGING
MARKETS DEBT
Emerging markets debt has, over the past decade, attracted growing attention from
investors as a higher-yielding alternative. Investors had initially insisted on hard currency emerging markets bonds but, increasingly, they have added local currency
bonds to their portfolios.
The bond markets of the emerging markets
have grown substantially over the past decade,
and the investment universe has become
broader. More and more countries, currencies,
and issuers have been added, liquidity has
increased substantially, investors’ diversification
opportunities have been considerably expanded,
and the quality of the issuers has improved.
Among the most common representatives of
the various EMD markets are the J.P. Morgan
EMBI Global Diversified Index for government
bonds in hard currencies, the J.P. Morgan
CEMBI Broad Diversified Index for corporate
bonds in hard currencies, and the J.P. Morgan
GBI-EM Global Diversified Index for government
bonds in local currencies.1
When establishing an emerging markets debt
(EMD) mandate, many questions have to be
answered. Passive or active management? Hard
or local currencies? Government and corporate
bonds? Is a “blend” concept, which invests
across investment options, the right solution?
Or perhaps a total return strategy independent of
index benchmarks? How to deal with the diverse
currency risk?
In historical terms, hard currency investments—
as listed in the J.P. Morgan EMBI Global
Diversified Index—received the greatest attention
from investors. This is mainly because it had a
large investable universe, the currency risk was
relatively easy to manage for many investors, and
the index is well diversified across 63 countries
and 127 issuers.
J.P. Morgan emerging markets debt indices
are the most widely followed among asset
managers in the industry. Since most investors
in emerging markets debt will have some
exposure to these indices, it is important to
understand how they are constructed as well as
their potential benefits and drawbacks.
For some years the strongest market growth
has been in the J.P. Morgan CEMBI Broad
Diversified Index for hard currency corporate
bonds and the J.P. Morgan GBI-EM Global
Diversified Index for local currency government
bonds. These markets are often viewed as the
“actual” emerging markets bond markets for
investors and active managers over the long
term, because investors can potentially exploit
illiquidity and inefficiency premiums.
Currency management can play an important
role for non-US investors. All emerging markets
debt indices are listed in base form in US dollars,
so investors must decide whether to hedge
currency exposure.
2
The Global Bond Market
Political discussion in recent years has focused on the
topics of “saving” and “austerity.” In Europe—but
also in the United States, Japan, and many emerging
markets—the global financial crisis appears to have
inspired some rethinking, and many politicians have
increasingly taken the position that “you can only
spend what you’ve brought in.”
Some commentators argue that not only the state, but
the banks, some enterprises, and private consumption as well, must deleverage. Other critics have
complained that the austerity of recent years endangers growth, jobs, and prosperity. From this debate, it
is reasonable to assume that the world bond markets
have not grown in some time as less and less debt is
being created.2
However, the opposite has actually occurred.
Worldwide debt and the volume of the world bond
markets have continued to rise since the financial
market crisis, albeit at muted rates. The world remains
a debt economy and the economic actors remain
dependent upon new loans. The inventories of financial assets—especially bonds—have risen steadily and
reached a new high at the end of 2014 (Exhibit 1).3
A large portion of the assets on the financial markets
is either not relevant or not accessible to the typical
investor. When limiting the bond market to those
bonds that are publicly accessible and liquid enough
to be listed in bond index benchmarks (e.g., indices
of Bank of America Merrill Lynch), the assets under
consideration shrink considerably, but are still huge and
have grown explosively in the last decade. The largest
portion of the overall volume of the $56.0 trillion (liquid)
world bond market consists of (local) government
bonds ($33.3 trillion), followed by corporate bonds
($7.9 trillion), and secured bonds (covered bonds or
asset backed securities ($6.8 trillion)) (Exhibit 2).4
Exhibit 1
Despite Talk of Austerity, Financial Assets Have Continued to Grow Since 2008
(USD Trillion)
285
300
261
242
250
222
211
65
200
150
178
50
0
54
47
52
64
69
48
34
55
46
51
54
56
58
60
60
61
60
60
27
28
30
30
31
37
42
55
56
58
26
26
27
14
14
14
15
15
14
14
14
12
42
46
50
54
54
57
60
61
61
62
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
33
45
30
23
100
262
243
294
272
46
38
23
19
10
Nonsecuritized Loans Outstanding
Nonfinancial Corporate Bonds Outstanding
Public Debt Securities Outstanding
Securitized Loans Outstanding
Financial Institutions Bonds Outstanding
Stock Market Capitalization
As of 31 December 2014
Source: BIS, Deutsche Bank, Haver, McKinsey Global Institute estimates
3
Emerging Markets Debt
This is true, in particular, of the “non-sovereigns”
segment—corporate bonds. On the positive side, the
strong market growth means a larger universe and
better diversification opportunities for investors than
in the past, but it also implies that the debt of many
emerging markets, coming from an extremely low
basis, has steadily risen (Exhibit 3).
At the end of 2014, the $6 trillion (liquid) emerging
markets bond market made up slightly more than 10%
of the global bond market, but has grown substantially
more than the global bond market in recent years.
Exhibit 2
The World Bond Market Has Grown Significantly in the Past Decade
Face Value of Index-Qualifying Debt (USD Billion)
40
2014
2004
30
20
10
0
Local
Government
External/Quasi
Government
Securitized/
Collateralized
High Grade
Corporates
High Yield
Corporates
As of 31 December 2014
Source: BofA Merrill Lynch Indices
Exhibit 3
The Growth of the Emerging Markets Bond Market Has Been Strong
Outstanding Debt (USD face value in millions)
YOY Growth Rate
External
NonSovereign
External
Local
Local
External
NonNonSovereign Sovereign Sovereign Sovereign
(%)
(%)
(%)
(%)
Total (%)
Local
Sovereign
External
Sovereign
Local
NonSovereign
Total
2004
804,891
331,628
176,457
N/A
1,312,976
—
—
—
—
—
2005
1,110,352
374,565
214,086
N/A
1,699,003
38.0
12.9
21.3
N/A
29.4
2006
1,338,553
383,271
277,837
N/A
1,999,660
20.6
2.3
29.8
N/A
17.7
2007
1,604,257
401,087
344,152
N/A
2,349,496
19.9
4.6
23.9
N/A
17.5
2008
1,719,223
386,239
348,855
N/A
2,454,317
7.2
-3.7
1.4
N/A
4.5
2009
2,035,395
435,402
423,569
N/A
2,894,366
18.4
12.7
21.4
N/A
17.9
2010
2,421,852
488,516
565,513
N/A
3,475,881
19.0
12.2
33.5
N/A
20.1
2011
2,770,891
524,454
679,862
N/A
3,975,207
14.4
7.4
20.2
N/A
14.4
2012
3,190,093
576,903
889,602
148,181
4,804,778
15.1
10.0
30.9
N/A
20.9
2013
3,579,600
610,594
1,101,836
161,313
5,453,342
12.2
5.8
23.9
8.9
13.5
2014
3,921,508
603,969
1,253,949
205,370
5,984,796
9.6
-1.1
13.8
27.3
9.7
As of 31 December 2014
Source: BofA Merrill Lynch Bond Indices
4
For the investor (as well as the issuer) in emerging
markets, the distinction between “external debt” and
“local debt” is of central importance. External debt
comprises the bonds of issuers of emerging markets
that have been issued in hard currencies—the US
dollar, euro, British pound, or Japanese yen. About
75% of these bonds are listed in US dollars; for this
reason, this is sometimes referred to as the dollar
segment of emerging markets bonds. On the other
hand, “local debt” consists of bonds that the issuer
issues in its own currency.
If, for example, Brazil finances a bond that is denominated in US dollars, this bond is external (sovereign)
debt. If Brazil issues a bond in its own currency, the
real, the bond is part of local (sovereign) debt. This
logic applies not only to country issuers but companies as well. If Petrobras, domiciled in Brazil, issues a
bond in US dollars, this bond is part of external (nonsovereign) debt. If it finances itself in Brazilian reals,
the bond is part of local (non-sovereign) debt.
External debt, or “emerging markets hard currency
bonds,” was the dominant asset class for decades
since the first debt was issued in the 1960s. Due
to their underdevelopment and weakness, most
emerging countries were not able to issue bonds in
their own currency, but instead had to issue bonds in
currencies of the developed world.
This has changed substantially in the last ten years.
A great number of emerging markets now issue
bonds that are denominated in local currencies. This
“local sovereign market” has therefore been growing
much more strongly than the traditional hard currency
market for government bonds. At the end of 2014, the
market for government bonds in local currencies was,
at $3.9 trillion, more than six times as large as the
government bond market in hard currencies (based on
Bank of America Merrill Lynch indices, Exhibit 3).
The emerging markets corporate bond market is
somewhat different. A growing market does exist
for corporate bonds in local currencies, but it is highly
fragmented, small in volume, and often not accessible to foreigners. Therefore, corporate bonds in hard
currencies dominate the emerging markets corporate
bond indices, while the corporate bond market in local
currencies is under-represented in the indices.
Overview of the Emerging
Markets Debt Index
Benchmarks
Most index providers offer a series of emerging
markets debt indices. It is generally true that not all
emerging markets bonds are reflected in the conventional indices. The index providers concentrate on
the most liquid primary countries and currencies in
order to make the indices not too complicated and
somewhat flexible. In addition, corporate bonds
and inflation-indexed bonds are not included in the
“normal” emerging markets debt indices.
This means that passive ETF investments in emerging
markets debt indices reflect only a small part of the
actual investable universe. In particular, the areas
of the markets where illiquidity and inefficiency
premiums can be expected are not contained in index
investments (Exhibit 4).
J.P. Morgan offers a diverse range of emerging
markets indices, which are used by most asset
managers and emerging markets debt investors.
J.P. Morgan distinguishes between three individual
index groups. On the one hand, there is the J.P.
Morgan GBI-EM index family, which encompasses six
different indices and relates to the local currencies of
emerging markets. This is distinguished from the J.P.
Morgan EMBI family, which contains three emerging
markets indices that relate to hard currencies. Finally,
J.P. Morgan offers the J.P. Morgan CEMBI index
family, which encompasses four indices that relate
specifically to emerging markets corporate bonds
(hard currency) and are not contained in the other
emerging markets debt indices.
The most important representatives of the three
index families are the investable “diversified” indices,
which are heavily used in asset management, i.e.,
the J.P. Morgan EMBI Global Diversified Index
for government bonds in hard currencies; the J.P.
Morgan CEMBI Broad Diversified Index for corporate
bonds in hard currencies; and the J.P. Morgan GBI-EM
Global Diversified Index for government bonds in local
currencies (Exhibit 5). (We do not address the money
market index J.P. Morgan ELMI+ in this publication.)
5
Exhibit 4
Passive Indices Often Don’t Contain All Issuers of Emerging Markets Debt
Colored Countries Represent Those in the JPM EMBI Global Diversified Index (63 Countries) for Hard Currency and JPM GBI-EM Global
Diversified Index (16 Countries) for Local Markets
Hard Currency Universe (70+ Countries)
Latin
America
Asia
Eastern
Europe
Argentina
China
Aruba
Fiji
Bahamas
Local Market Universe (45+ Countries)
Africa/M.E.
Latin
America
Asia
Eastern
Europe
Africa/M.E.
Albania
Algeria
Argentina
China
Belarus
Angola
Armenia
Angola
Brazil
India
Czech Republic Botswana
India
Azerbaijan
Bahrain
Chile
Indonesia
Georgia
Egypt
Barbados
Indonesia
Belarus
Cote d’Ivoire
Colombia
Hong Kong
Hungary
Ghana
Belize
Hong Kong
Bosnia
Congo
Costa Rica
Malaysia
Kazakhstan
Israel
Bolivia
Malaysia
Bulgaria
Egypt
Dominican
Republic
Mongolia
Poland
Kenya
Brazil
Mongolia
Croatia
Ethiopia
Mexico
Pakistan
Romania
Malawi
Cayman Islands Pakistan
Czech Republic Gabon
Peru
Philippines
Russia
Mauritius
Chile
Philippines
Georgia
Ghana
Uruguay
Singapore
Serbia
Namibia
Colombia
Seychelles
Hungary
Iraq
South Korea
Turkey
Nigeria
Costa Rica
South Korea
Kazakhstan
Israel
Sri Lanka
Ukraine
South Africa
Dominican
Republic
Sri Lanka
Latvia
Jordan
Thailand
Tanzania
Ecuador
Thailand
Lithuania
Kuwait
Vietnam
Uganda
El Salvador
Vietnam
Macedonia
Kenya
UAE
Grenada
Poland
Lebanon
Zambia
Guatemala
Romania
Morocco
Honduras
Russia
Mozambique
Jamaica
Serbia
Namibia
Mexico
Slovak
Republic
Nigeria
Panama
Slovenia
Oman
Paraguay
Turkey
Qatar
Peru
Ukraine
Rwanda
Trinidad &
Tobago
Senegal
Uruguay
South Africa
Venezuela
Tanzania
Tunisia
UAE
Zambia
As of 28 February 2015
Source: J.P. Morgan
6
Exhibit 5
Characteristics of the Most Widely Used EMD Indices
JPM EMBI Global
Diversified
JPM CEMBI Broad
Diversified
JPM GBI-EM Global
Diversified
JPM ELMI+
Hard Currency
Sovereign
Hard Currency
Corporate
Local Currency
Sovereign
Local Currency
T-bills
Duration (Years)
7.16
4.84
4.96
0.15
YTM (%)
5.57
5.20
6.34
4.58
Spread (bps)
369
360
N/A
N/A
IG Yield (%)
4.20
4.06
N/A
N/A
IG Spread (%)
218
234
N/A
N/A
HY Yield (%)
8.10
7.88
N/A
N/A
HY Spread (%)
639
648
N/A
N/A
# of Countries
63
49
16
22
# of Issuers
127
549
16
N/A
N/A
Asset Class
470
1166
197
Market Cap (USD Billions)
675.8
808.7
915.9
N/A
2015 YTD Performance (%)
2.01
2.36
-3.96
-2.41
# of Instruments
2014 Performance (%)
7.43
4.96
-5.72
-7.03
Credit Quality (Average)
BBB-
BBB
BBB+
N/A
IG
59.9
65.4
93.4
N/A
HY
40.1
34.6
6.6
N/A
A and above
22.4
27.3
37.9
N/A
BBB
37.5
38.1
55.5
N/A
BB
19.4
16.3
4.9
N/A
B
14.8
9.1
1.7
N/A
CCC and below
2.8
2.8
0.0
N/A
Non Rated
3.1
6.4
0.0
N/A
As of 31 March 2015
Source: Bloomberg, Lazard
The fact that all emerging markets debt indices are,
in principle, calculated on the basis of US dollars is of
critical importance for the overseas investor. Thus, for
example, a euro zone investor with exposure to such
an emerging markets debt index benchmark initially
has currency risk. If the investor does not wish to
leave this risk open, he must supplement the mandate
to include currency hedging or draw upon benchmarks
hedged in euros from the outset.
The decision to hedge currency risk is not trivial. While
the performance of the emerging markets debt benchmarks in US dollars over the last twelve years had
largely corresponded to the value development of the
indices hedged in euros (for a short period there were
temporarily stronger deviations of the indices due to
the hedging costs), the performance of the unhedged
indices converted into euros strongly depended on the
volatile US dollar/euro exchange rate.
7
Exhibit 6
Currencies Have Had a Significant Impact on Emerging Markets Debt Performance
J.P. Morgan EMBI Global Index
(November 2012=100)
130
Euro
120
110
USD
100
Hedged in Euro
90
Nov 2012
Mar 2013
Jul 2013
Nov 2013
Mar 2014
Jul 2014
Nov 2014
Mar 2015
As of 31 March 2015
The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for US dollar–denominated debt instruments issued by emerging
markets sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. The index is unmanaged and has no fees. One cannot invest directly
in an index.
Source: Bloomberg, Lazard
In periods of high currency volatility such as, for
example, 2013 (when the euro was strong) and the
first quarter of 2015 (when the euro was weak), the
currency movement can be as critical a source of
returns to a (non-currency-hedged) emerging markets
debt mandate as the performance of the debt market
itself (Exhibit 6).
It is necessary to distinguish this US dollar risk for a
euro investor, due to the listing of the index benchmark in US dollars, and the actual currency risk of the
emerging markets debt local currency investments.
If a euro zone investor grants an emerging markets
local currency mandate according to the J.P. Morgan
GBI-EM Global Diversified Index, for example, and
decides in favor of the index hedged in euros as the
benchmark, this merely means that the US dollar/
euro risk that is contained in the initial benchmark is
hedged for the euro investor. The local currency risk of
the Brazilian real, for example, contained in the index
or bonds denominated in reals in relation to the US
dollar remain unaffected because the investor has,
by deciding in favor of an investment in emerging
markets local currency bonds, specifically decided in
favor of the local currencies of the emerging markets
as the earnings driver.
Since we have described the J.P. Morgan CEMBI
indices in detail in a separate publication, Emerging
Markets Corporate Bonds, we focus on the J.P.
Morgan GBI-EM indices and the J.P. Morgan EMBI
Index group below.5
J.P. Morgan GBI-EM
Indices for Local Currency
Bonds
The J.P. Morgan GBI-EM indices encompass a
family of six indices that have existed since June
2005 (calculated back to December 2002) and differ
from one another through the size of the investment
universe, the minimum volume and liquidity, and the
degree of diversification.6 The investment universe is
limited to government bonds in the local currencies
of the emerging markets with minimum liquidity and
minimum terms.
J.P. Morgan first calculates the J.P. Morgan GBI-EM
Broad Index, then the J.P. Morgan GBI-EM Global
Index, and finally the J.P. Morgan GBI-EM Index. All
three indices are also made available in a diversified
version within a framework of slight modifications
(Exhibit 7).
The most comprehensive index variant with the most
bonds and the lowest quality and liquidation restrictions is the GBI-EM Broad version of the indices. On
the other side of the spectrum is the GBI-EM variant,
which concentrates on the countries, currencies,
and bonds that are the largest, most liquid, and most
accessible and which are most easily replicable (for
example, as benchmarks for ETFs).
8
Exhibit 7
The JPM GBI-EM Index Performance in US Dollars
Index, 2004=100
350
JPM GBI-EM Broad
JPM GBI-EM Broad Div
JPM GBI-EM
JPM GBI-EM Global
JPM GBI-EM Div
JPM GBI-EM Global Div
250
150
100
50
2004
2006
2008
2010
2012
2014
As of 20 April 2015
The JP Morgan Government Bond Index-Emerging Markets Global (GBI-EM Global) is a comprehensive, global local emerging markets index, and
consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. The index is
unmanaged and has no fees. One cannot invest directly in an index.
Source: Thomson Reuters Datastream
In the middle of the spectrum is the “GBI-EM Global”
version, which attempts to take a middle path
between a large universe and high flexibility and is
also described by J.P. Morgan as the index of investable bonds.
The “diversified” variants differ from the initial variants
because the country and currency weightings of the
base variants are changed by means of a sophisticated
calculation methodology. The extremely high weighting
of individual countries and currencies in the marketcapitalization-weighted initial index is reduced and
limited to a certain maximal weighting. Smaller markets
are given a greater weighting in the “diversified” index
to achieve a more balanced country and currency
diversification, even though the weighting does not
necessarily reflect the actual market weighting.
The J.P. Morgan GBI-EM Global Diversified Index is
followed by most active managers, and we focus on it
below. The market capitalization of this index has risen
steadily in recent years, reaching about $916 billion
(converted) in March 2015 (Exhibit 8).
From the standpoint of regional weighting, the index
has 45% in Asia, followed by 25% in Europe, 20% in
Latin America, and 10% in Africa (Exhibit 9).
The number of countries in the J.P. Morgan GBI-EM
Global Diversified Index was relatively narrowly
limited to 16 countries in March 2015; some countries, such as Malaysia, Poland, Brazil, South Africa,
or Mexico, are limited to 10% (regular adjustment to
market development), while their weighting according
to market capitalization in the J.P. Morgan GBI-EM
Global Index is substantially greater (Exhibit 10).
The index’s average yields were volatile in recent
years and fluctuated between 5.22% and 8.99%, but
they always offered a greater yield than the US and
euro zone government bond markets. The duration of
this index was always substantially below the duration of the bond indices of developed markets. Due,
however, to falling interest rates and the growing
ability of emerging markets countries to issue somewhat longer terms, the duration has gradually risen in
recent years (Exhibit 11).
9
Exhibit 8
The JPM GBI-EM Global Diversified Index Has Grown Steadily
(USD Billion)
1,200
800
400
0
2004
2006
2008
2010
2012
2014
As of 20 April 2015
The JP Morgan Government Bond Index-Emerging Markets Global Diversified Index is a uniquely weighted version of the GBI-EM Global. It limits the
weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt
outstanding. The countries covered in the GBI-EM Global Diversified are identical to those covered by the GBI-EM Global Index. The index is unmanaged
and has no fees. One cannot invest directly in an index.
Source: Thomson Reuters Datastream
Exhibit 9
Regional Weighting of the JPM GBI-EM Global Diversified Index
Weighting of Regions (%)
100
Middle East/Africa,
last 9.92
80
Asia, last 20.4
60
Europe, last 24.85
40
Latin America, last 44.84
20
0
2008
2009
2010
2011
2012
2013
2014
As of 20 April 2015
Source: Thomson Reuters Datastream
Exhibit 10
Country Weightings in the JPM GBI-EM Global Diversified Index
9.22
8.82
8
7.71
7.40
5.33
4.80
4
As of 21 April 2015
Source: Bloomberg, Lazard
Romania
Hungary
Russia
Colombia
Thailand
Indonesia
Turkey
South
Africa
Mexico
Poland
Malaysia
Brazil
0
2.45
1.85
1.73
0.78
0.47
0.11
Chile
9.73
Phillipines
9.80
Colombia
Global
10.05
Nigeria
10.08
Peru
12 10.44
10
J.P. Morgan EMBI Indices
for Hard Currency Bonds
In contrast to the index of hard currency bonds, the
J.P. Morgan GBI-EM Global Diversified Index is almost
all investment grade. At the end of March 2015, only
two countries (Hungary and Nigeria) did not have an
investment grade rating for their local currency issues;
the high yield portion in the J.P. Morgan GBI-EM
Global Diversified Index is below 7%. It should be
noted that, particularly in the emerging markets, the
country rating in local currencies is often higher than in
foreign currencies, because issues in foreign currencies involve greater risks for the issuer.
The J.P. Morgan EMBI index family encompasses
three indices that differ from one another through the
size of the investment universe, minimum volume and
liquidity, and diversification.7 The investment universe
is limited to government bonds in the hard currencies of the emerging markets with minimum liquidity
and minimum terms. J.P. Morgan first calculates the
EMBI+ Index, secondly the EMBI Global Index, and
thirdly the EMBI Global Diversified Index (Exhibit 12).
Exhibit 11
Emerging Markets Bond Duration Has Gradually Risen
JPM GBI-EM Global Diversified Index
10
Yield (%)
9
8
7
6
Duration (Years)
5
4
3
2002
2004
2006
2008
2010
2012
2014
As of 31 March 2015
Source: Bloomberg, Lazard
Exhibit 12
Total Returns of the JPM EMBI Indices
(%)
900
700
JPM EMBI+
JPM EMBI Global Div
JPM EMBI Global
500
300
100
1994
1998
2002
2006
2010
2014
As of 21 April 2015
The performance quoted represents past performance. Past performance does not guarantee future results. The index is unmanaged and has no fees.
One cannot invest directly in an index.
Source: Thomson Reuters Datastream
11
J.P. Morgan’s first emerging markets hard currency
index, which was introduced in July 1995 and calculated back to December 1993, was the J.P. Morgan
EMBI+ Index. Like all EMBI indices, it is weighted on
the basis of the market capitalization of government
bonds, but it is the sub-index with the greatest liquidity
requirements, so some markets are excluded.
This distinguishes it from the J.P. Morgan EMBI
Global Diversified Index, which was simultaneously
introduced with the same back-calculation, but
reflects a restriction of country weightings, such that
the large markets are weighted lower and the small
markets are weighted higher than in the J.P. Morgan
EMBI Global Index.
The J.P. Morgan EMBI Global Index was introduced in
July 1999, but likewise is calculated back to December
1993. It is somewhat more comprehensive, broader,
and thus more representative than the EMBI+ Index.
It also contains quasi government bonds and its
country weightings are based on the normal market
capitalization without weighting restrictions.
The J.P. Morgan EMBI Global Diversified Index has
become the market standard in active management.
Therefore we will focus on this index benchmark.
The market capitalization of this index has grown in
recent years and reached $676 billion in March 2015
(Exhibit 13).
From a regional weighting standpoint the index is 36%
in Latin America, 30% in Europe, 20% in Asia, 10% in
Africa, and 4% in the Middle East (Exhibit 14).
Exhibit 13
Market Capitalization of the JPM EMBI Global Diversified Index Has Grown Rapidly Since 2009
(USD Billions)
750
600
450
300
150
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
As of 21 April 2015
The JP Morgan Emerging Markets Bond Index (EMBI Global Diversified) is a uniquely weighted version of the EMBI Global. It limits the weights of those
index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. The
countries covered in the EMBI Global Diversified are identical to those covered by the EMBI Global. The index is unmanaged and has no fees. One cannot
invest directly in an index.
Source: Thomson Reuters Datastream
Exhibit 14
Regional Weightings for the JPM EMBI Global Diversified Index
(%)
100
Middle East, last 3.78
Africa, last 9.96
80
Asia, last 19.64
60
Europe, last 30.21
40
20
0
1994
Latin America, last 36.41
1998
As of 21 April 2015
Source: Thomson Reuters Datastream
2002
2006
2010
2014
12
In the past, the duration of this index was usually
substantially lower than the duration of the bond indices
of the developed world, but this has incrementally
changed recently. Due to falling interest rates and the
growing ability of the emerging markets countries to
issue somewhat longer terms, the index’s duration
has risen steadily, such that it has nearly reached the
duration of indices of the developed world (Exhibits 16
and 17).
The country portfolio is much more broadly diversified in the J.P. Morgan EMBI Global Diversified Index
(63 countries) than in the local currency indices; the
weightings of some large-volume countries such as
Mexico, Brazil, Turkey, Venezuela, and Russia are
limited in favor of smaller countries to improve diversification (Exhibit 15).
The average yields of this index have been much
more volatile in recent years than in the local currency
index. It fluctuated between 4.3% and 11.0%, but
throughout offered greater yields than the US government bond market or the yields of the euro zone.
Exhibit 15
Weighting of Selected Countries in the JPM EMBI Global Diversified Index
(%)
Brazil, last 4.32
24
Venezuela, last 1.91
Poland, last 3.06
Indonesia, last 4.49
Philippines, last 4.76
18
Russia, last 4.29
Turkey, last 4.60
China, last 4.13
12
Chile, last 3.37
Peru, last 3.07
Argentina, last 2.16
6
Mexico, last 4.42
Panama, last 2.53
Colombia, last 3.85
0
1994
1998
2002
2006
2010
South Africa, last 3.31
2014
As of 21 April 2015
Source: Thomson Reuters Datastream
Exhibit 16
Falling Interest Rates and Longer Terms Have Raised EM Bond Durations
JPM EMBI Global Diversified Index
11
10
9
Yield (%)
8
7
6
Duration (Years)
5
4
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
As of 21 April 2015
The performance quoted represents past performance. Past performance does not guarantee future results. The index is unmanaged and has no fees. One
cannot invest directly in an index.
Source: Thomson Reuters Datastream
13
has declined somewhat in the course of the changed
monetary policy in the United States since mid-2013
and the drop in the price of oil since mid-2014. But at
any rate, about 60% of all bonds in the J.P. Morgan
EMBI Global Diversified are investment grade today,
and 40% are high yield (Exhibit 18).
The quality of the government bonds in the J.P.
Morgan GBI-EM Global Diversified Index has steadily
improved. This is a result of the positive structural
development of the emerging markets, and the
percentage of securities with investment grade
ratings has risen substantially, although this trend
Exhibit 17
Yield Spread of the JPM EMBI Global Diversified Index over Bunds and US Treasuries
Yield spread over 10-Year Treasuries and 10-Year Bunds (%)
12
8
Over Bunds
4
Over Treasuries
0
1998
2002
2006
2010
2014
As of 21 April 2015
The performance quoted represents past performance. Past performance does not guarantee future results. The index is unmanaged and has no fees.
One cannot invest directly in an index.
Source: Thomson Reuters Datastream
Exhibit 18
The Percentage of Investment Grade Issues in the JPM EMBI Global Diversified Index Has Risen over the
Past Ten Years
(%)
70
60
50
40
30
Jun 2003
Feb 2005
As of 31 March 2015
Source: Bloomberg, Lazard
Oct 2006
Jun 2008
Feb 2010
Oct 2011
Jun 2013
Feb 2015
14
Summary and Outlook
Over the past decade, emerging markets bond markets have increasingly drawn the focus of global investors
as a higher-yield alternative to developed markets bonds. Emerging markets debt now plays a role even
in the portfolios of many conservative investors. Initially, investors insisted on the hard currency emerging
markets bonds, but increasingly local currency bonds are being included in portfolios.
In recent years, not only investors, but markets themselves have further evolved. The emerging markets
bond markets have grown steadily, and the investment universe has become broader. More and more
countries, currencies, and issuers have been added, liquidity has grown, investors’ diversification
opportunities have been expanded, and the quality of the issuers has improved. The emerging markets bond
market has become a completely standard/strategic asset class for many investors.
When a market has reached this stage of development, the number of necessary decisions for investors has
also risen—it is not sufficient to simply commit oneself to emerging markets debt as a capital investment.8
Does the investor wish to implement a benchmark concept that is close to the index or does one desire active
management vis à vis benchmarks and greater tracking error? Should the investor consider just hard currencies,
or also local currencies? Should corporate bonds play a role? Is a “blend” concept that invests in a combination
of currencies and issuers the right solution? Or perhaps a total return strategy independent of benchmarks is
preferred, in order to limit the risks?9 How should the investor deal with the diverse currency risk?
An analysis of the emerging markets indices, as well as their evolution over the past several years into more
diversified offerings, can help to better understand the market. The most widely used representatives of the
various markets are the J.P. Morgan EMBI Global Diversified Index for government bonds in hard currencies,
the J.P. Morgan CEMBI Broad Diversified Index for corporate bonds in hard currencies, and the J.P. Morgan
GBI-EM Global Diversified Index for government bonds in local currencies.
Viewed historically, hard currency investments—as identified by the J.P. Morgan EMBI Global Diversified
Index—were favored by investors. For a long time they had a superior market size, the currency risk was
easy to manage for euro and other global investors because of the strong focus on US dollars, and the
portfolio on which the index is based is well diversified with 63 countries and 127 issuers. On the other
hand, the index has become more efficient in recent years and has scarcely grown through new issues, such
that it has become ever more costly and challenging for active managers to beat. On the other hand, ETF
investments have a hard time generating the “market yield,” because they have to earn the bid-ask spreads
and do not reflect the overall market.
For some years, the strongest market growth has been posted in the J.P. Morgan CEMBI Broad Diversified
Index for corporate bonds in hard currencies and the J.P. Morgan GBI-EM Global Diversified Index for
government bonds in local currencies. Over the long term, these markets are seen as the “actual” emerging
markets bond markets for investors and active managers, in which the investor may still be rewarded with
illiquidity and inefficiency premiums.
Currency management is accorded an important role for overseas investors. All emerging markets debt
indices are listed in base form in US dollars and the investor must decide whether to hedge the currency
exposure or leave it open.
15
Notes
1 The JP Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for US dollar–denominated debt instruments issued by emerging markets sovereign
and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. The JP Morgan Corporate Emerging Markets Bond Index Global (CEMBI Global) tracks total returns for
US–denominated corporate bonds issued by emerging markets entities. The JP Morgan Government Bond Index-Emerging Markets Global Diversified Index is a uniquely
weighted version of the GBI-EM Global. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible
current face amounts of debt outstanding. The countries covered in the GBI-EM Global Diversified are identical to those covered by the GBI-EM Global Index. These indices
are unmanaged and have no fees. One cannot invest directly in an index.
2 As of 2014. Source: F. Schui: Austerität – Politik der Sparsamkeit: Die kurze Geschichte eines grossen Fehlers [Austerity – Policy of Frugality: The Short Story of a Big
Mistake], Karl Blessing Verlag.
3 As of11 February 2015. Source: S. Sanyal: The Random Walk – Mapping the World’s Financial Market 2015, Deutsche Bank Research, White Paper.
4 As of 14 January 2015. Source: P. Galdi: World Bond Market Growth Trends, Bank of America Merrill Lynch Bond Index Almanac, White Paper.
5 As of August 2013. Source: W. Krämer; Emerging Markets Corporate Bonds, Lazard Asset Management, Hintergrund [Background].
6 As of February 2015. Source: G. Kim / S. Pithavadian: GBI-EM, JPMorgan Global Index Research, White Paper.
7 G. Kim: EMBI Global and EMBI Global Diversified, Rules and Methodology, JPMorgan Global Index Research, White Paper, May 2013: G. Kim et al: EMBI+, EMBI Global,
EMBI Global Diversified, JPM Global Index Research, JPM Fixed Income Index Products Guides, January 2013.
8 As of March 2012. Source: JPM: Digging Deeper, Emerging Market Debt Choices, J.P. Morgan Asset Management, White Paper.
9 As of July 2011. Source: W. Krämer: Total Return-Konzepte mit Emerging Markets Debt [Total Return Concepts with Emerging Markets Debt], Lazard Asset Management,
Hintergrund [Background].
Important Information
Published on 16 November 2015.
Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this document and are subject to change.
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