FTSE’s index revamp is eyeing the Korean and Indian bond markets

(Bloomberg) — South Korea has ticked all the boxes in a bid to get its bonds included in a key FTSE Russell index, while India has stayed away from public reforms — but the country’s popularity with global investors could give it an edge, one Index to join corresponding benchmark.

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FTSE Russell will announce inclusion in benchmarks on October 8, including its World Government Bond Index, which tracks $29 trillion in global fixed income securities. Seoul hopes it has finally made the cut after overhauling its currency and debt market operations.

At the same time, India, which despite its reform laggards joined a flagship gauge from JPMorgan Chase & Co., could this time be included in FTSE Russell’s $4.6 trillion emerging market bond index. According to a document seen by Bloomberg, the index provider told investors that it had had very positive discussions with India’s securities regulator.

Vietnamese stocks are on the watchlist for emerging markets rise from the frontier.

It is an opportune time to gain access to the large investors that this status attracts. Global money is flowing back into emerging economies after years of losses as borrowing costs in the U.S. have fallen thanks to Federal Reserve interest rate cuts, prompting investors to look abroad for better returns. India’s JPMorgan index-eligible bonds have attracted $14 billion in inflows this year through the end of August.

“The current environment is indeed favorable for EM bonds as many investors seek higher returns and diversification,” said Althea Spinozzi, head of fixed income research at Saxo Bank AS in Hellerup, Denmark. “Index inclusions tend to attract significant capital inflows as global investors tracking these benchmarks adjust their portfolios.”

The South Korean government expects joining the WGBI will bring in up to 90 trillion won ($68 billion) in inflows. This would be a welcome source of new funds, especially given that the rapidly aging country is expected to increase public debt next year.

And South Korea appears at first glance to be a top candidate, after several attempts for more than a decade. Since being placed on the watchlist for inclusion in the WGBI two years ago, Seoul has extended won trading hours and set up a system with Euroclear so that foreign investors do not have to open accounts with local banks. Korea claims to have met all conditions for index inclusion.

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However, from July 1 to August 28, there were only 26 transactions in the country’s government bonds through Euroclear. Goldman Sachs Group Inc. strategists say such low volumes mean inclusion will likely be delayed until 2025, and Morgan Stanley also expects inclusion to happen next year.

Even if Korea fails to make the cut this year, “I expect the language in the review to sound a little more positive given efforts to improve access to bonds and foreign exchange,” said Low Guan Yi, Asia head of fixed-line operations Returns on M&G investments in Singapore.

India’s situation

India, on the other hand, has not reached any agreement with Euroclear at all. In its last assessment in March, FTSE Russell cited India as a reason for the difficult registration process for foreign investors, as well as the time it takes to process trades and taxes.

But that didn’t stop JPMorgan from adding Indian government bonds to its own closely-tracked emerging market bond index in June. The country benefited from demand for investment vehicles in key emerging markets following the exclusion of Russia over its invasion of Ukraine.

India’s capital markets regulator said last month that it was working to streamline the registration process for foreign investors buying government bonds.

FTSE Russell cites positive discussions with India SEBI on bonds

According to analysts, Vietnam is only expected to be upgraded from a frontier to an emerging market in equities next year. A new rule that removes the requirement that foreign investors fully pre-fund stock trades – seen as a key sticking point – does not come into force until November 2nd.

“There is also demand for local bonds and emerging market equities,” said Jon Harrison, managing director of EM macro strategy at TS Lombard in London. “Lower global yields will help encourage investors.”

Bloomberg LP is the parent company of Bloomberg Index Services Ltd., which manages indices that compete with those of other providers.

– With support from John Cheng and Subhadip Sircar.

(Updates to add reference to meeting with Indian regulator in third paragraph.)

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