Bond bulls lift bets ahead of index inclusion

India’s index-eligible bonds have attracted US$10bil since the inclusion was announced in September. — Bloomberg

MUMBAI: Investors tracking JPMorgan Chase & Co’s emerging markets bond index have already positioned for India’s inclusion, with 3.6% of their assets allocated to the nation’s sovereign debt as of the end of May, according to Morgan Stanley.

Most of the investors are active fund managers who don’t need to add exposure as India is added to the gauge on Friday, Min Dai, head of Asia macro strategy, wrote in a note.

More than half of them have already increased their India exposure, he said.

India’s index-eligible bonds have attracted US$10bil since the inclusion was announced in September.

This event could likely draw US$20bil to US$25bil of global flows into local debt, according to JPMorgan.

The nation will have a 1% weight in the index, which will gradually rise to 10% over a 10-month period.

“Investors could have some moderate overweight in both rates and foreign exchange in the size of 1% to 2%, if India keeps the rupee stable, maintains a hawkish monetary policy stance and the budget deficit is moderate,” Dai wrote in the note.

This suggests investors still need to add 8% to 9% of their assets in India over the next 10 months, he added.

JPMorgan estimated that foreign ownership of India’s bond market will nearly double to over 4.4% of outstanding, from the current 2.5%, over the next 12 months. Additionally, investors are overweight on the rupee, with 2.9% driven by pre-positioning ahead of the index inclusion.

India’s debt has become a favourite among emerging markets, with investors attracted to the nation’s solid finances and a stable currency.

The country’s inclusion will come at the expense of Thailand, South Africa, Poland, the Czech Republic, Brazil and Colombia, according to Morgan Stanley.

“Investors would need to either sell these markets’ bonds to fund India trades or use any new inflows to buy into India,” Dai wrote.

“This could prove to be a headwind for some of the biggest government bond index-emerging market countries in the next 10 months.”

HSBC Plc estimated that the five-year, seven-year, 10-year and 30-year benchmark India bonds alone could closely track the returns performance of the 28 index-eligible notes.

These maturities are likely to be the key target of foreign flows, strategist Himanshu Malik wrote in a note.

India’s addition will put Asia’s weight at 47.6% in the index, while a possible addition of the Philippines could take the region’s weighting above 50%, the note added.

JPMorgan has proposed two possible steps to rebalance the index in its latest consultation, Morgan Stanley said.

One suggestion was to cap Asia at 40%, which would give more weight to Latin America.

The second measure would reduce the weight of major economies, effectively lowering China’s weight from 10% to 6%, it added. — Bloomberg

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