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INVESTING/PORTFOLIO STRATEGIES

J.P. Morgan drops Czech Republic bonds to emerging markets indexes; inflows expected

J.P. Morgan Asset Management

Czech Republic sovereign bonds entered J.P. Morgan’s local currency emerging market index, the GBI-EM Global Diversified index, on Friday.

The country was previously in the GBI-CM (GBI Broad) and GBI-DM developed markets indexes. J.P. Morgan reclassified the country as a result of gross national income per capita falling below the J.P. Morgan index income ceiling for three consecutive years.

The country represents 3.3% of the index. Its inclusion resulted in slight decreases in the weightings of South African, Turkish and Polish bonds, said a news release by J.P. Morgan in February, when the Czech Republic’s inclusion was announced. According to estimates by the investment bank, which sponsors the index, about $207 billion of assets are benchmarked against this index.

Simon Lue-Fong, head of global emerging market bonds at Pictet Asset Management, said in an interview, “The expected inflows into this index will be worth €3 billion ($3.2 billion) to €4 billion, (increasing) 1% each month.”

Javier Sanchez, central Eastern Europe fixed-income strategist at UniCredit Bank in London, said in a separate interview: “The inflows resulting from this inclusion are expected to peak around June time and could even be around $4 to $6 billion.”

“We think that this rotation (of Czech Republic) from developed to emerging benchmark indices will also lead to a relative increase in the share of U.S. investors in the local market,” Mr. Sánchez said.

Czech bonds also become eligible for a number of other indexes in the GBI-EM series, effective Friday, including the GBI-EM Broad Diversified, GBI-EM Global Diversified Investment Grade and GBI-EM Diversified indexes.

It will also be added to the Euro EMBI Global Diversified index with a weight of 6.9%. J.P. Morgan estimates that $4 billion worth or products track the benchmark.