Bluebay Sees India Bond Inclusion Spur Outflow From South Africa, Colombia Assets

(Bloomberg) -- India’s inclusion in JPMorgan Chase & Co.’s emerging-market bond index may lead to outflows from South Africa and Colombia, according to a top fund manager.

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JPMorgan is slated to add India to its GBI-EM Global Diversified index in June. The South Asian nation’s weighting will reach the maximum 10% by March 2025. South Africa’s weight in the gauge stood at 8.21% as of March 29, while Colombia’s was 4.8%.

“Some markets will be reducing in weight given India is going up to 10% over a 10-month period,” said Brent David, senior portfolio manager for EM sovereign local currency portfolios at RBC BlueBay Asset Management in London. South Africa and Colombia have a “higher beta,” meaning they are more volatile than many other markets in the index that will be affected, he said.

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

“We find it a lot easier and a lot more flexible when it comes to India to take a duration view through interest-rate swaps, or to take the currency view through FX forwards,” David said, adding that he is currently neutral on both the rupee and rates in India.

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

The opening up of India’s trillion-dollar sovereign bond market to more foreign investment is expected to attract $40 billion in inflows, according to estimates from Goldman Sachs Group Inc. and others.

Overseas investors have poured about $8 billion into the nation’s index-eligible bonds since the JPMorgan’s September announcement. Yet, they hold just about 2% of the nation’s sovereign debt, leaving ample scope for new buyers.

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

Regarding inclusion, the asset manager plans to gradually scale into the position, aligning with the movements in the index, he said. This approach may change if they start “to take more of a structural positive or negative view on the bonds or the FX,” David added.

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

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