Bluebay sees the inclusion of Indian bonds driving asset outflows from South Africa and Colombia

(Bloomberg) — According to a top fund manager, India’s inclusion in JPMorgan Chase & Co’s bond index could lead to an outflow from South Africa and Colombia.

JPMorgan will add India to its GBI-EM Global Diversified index in June. The South Asian country’s weighting will reach the maximum 10% in March 2025. South Africa’s weighting in the indicator was 8.21% as of March 29, while Colombia’s was 4.8%.

“Some markets will lose weight as India will rise 10% over 10 months,” said Brent David, senior portfolio manager for local currency emerging government bond portfolios at RBC BlueBay Asset Management in London. South Africa and Colombia have “higher beta”, meaning they are more volatile than many other markets in the index that will be affected, he said.

This inclusion has prompted several funds to prepare for direct investments in the world’s fastest-growing major economy. However, some investors have used derivatives for indirect exposure due to procedural hurdles in accessing the Indian debt market.

“We find it a lot easier and a lot more flexible when it comes to India to look at the duration through interest rate swaps, or to look at the currency through forward exchange contracts,” David said, adding that he is currently neutral on both areas. the rupee and rates in India.

The BlueBay Emerging Market Local Currency Corporate Bond Fund, which David helps manage, has beaten 93% of its peers over the past three years, according to data compiled by Bloomberg.

According to estimates from Goldman Sachs Group Inc. and others, the opening of India’s trillion-dollar government bond market to more foreign investment is expected to attract $40 billion inflows.

Foreign investors have poured about $8 billion into the country’s index-eligible bonds since JPMorgan’s announcement in September. Yet they only own about 2% of the country’s debt, leaving plenty of room for new buyers.

BlueBay’s decision to invest directly in local bonds would depend on factors such as its cash positions, tax implications and view on interest rates, David said.

In terms of inclusion, the asset manager plans to gradually scale up this position in line with movements in the index, he said. This approach could change if they “take a more structurally positive or negative view on the bonds or the currency,” David added.

Adding markets like India to the JPMorgan index will help improve the gauge’s risk-reward profile given the country’s stable currency, he said.