JPMorgan Chase & Co. said it will remove the United Arab Emirates from its emerging-market bond indexes by June after the Middle Eastern nation exceeded the bank’s measures of wealth for three successive years.
The UAE, which accounts for 4.1% of the JPMorgan’s global diversified EM bond universe, will make its exit in four equal decrements beginning March 31, the New York-based bank said in a statement. The country will also fully leave the euro-denominated bond grouping — where it has a 1% weight — on March 31.
The growing riches of Middle Eastern countries have contrasted with their developing-market status in recent years, pushing JPMorgan to remove Kuwait and Qatar from its EM bond indexes last year. The gauges are widely tracked by investors and the loss of three investment-graded countries within a year could reduce inflows into them in the short term, and change the mix of investors over the longer term.
As a result of the removal, the headline spread — also called the spread to worst — for the Emerging Markets Bond Index Global Diversified is expected to widen by 10 basis points at the end of the phase-out period, according to JPMorgan index researchers including Kumaran Ram.
That spread, which represents the extra yield investors demand to own EM bonds rather than US Treasuries, stood at 247 basis points on Monday. The spread on UAE bonds is currently about 65 basis points.
UAE’s dollar bonds have rallied along with their peers on the Bloomberg EM Sovereign Total Return Index, handing total returns of 1.5% this year. The country is rated Aa2 at Moody’s, AA at S&P Global Ratings and AA Minus at Fitch Ratings, among the highest grades achieved by an emerging market.
The reclassification recognizes that the UAE’s per capita income as well as its cost of living are at developed-market levels — key criteria followed by JPMorgan. The Gulf state’s gross domestic product amounted to nearly $54,000 per person in 2024, according to data compiled by Bloomberg.
“In comparison to Qatar and Kuwait, the UAE’s aggregate weight in the index across sovereigns and quasi-sovereigns is higher,” said Fady Gendy, a portfolio manager at Arqaam Capital in Dubai. “Nonetheless, the impact should be relatively muted as actively-benchmarked fund managers are already underweight the region due to its tight spread.”
The removal of UAE from JPMorgan’s emerging-market universe means EM-focused funds that track the index would sell its bonds. The outflows could lead to a brief underperformance in the bonds as was seen in Qatar’s bonds after that country’s exit last year, Gendy said.
Nevertheless, money managers focused on developed markets but looking for diversification opportunities could start buying, helping to reverse that underperformance, he said. Demand from those so-called crossover investors as well as local buyers could mean the net impact of the reclassification will be negligible, he said.
“Any sizable spread widening on the back of forced selling by passive mandates and derisking by active managers will be seen as a buying opportunity by the local buyer base, which are generally benchmark-agnostic and yield focused,” he said.
Other potential investors who may be interested in UAE bonds could be those from the rest of the Middle East as well as Asian asset managers who are sensitive to credit quality, he said.
The bond reclassification comes even as UAE’s stocks are undergoing a valuation re-rating, with the benchmark index making the best start to a year since 2014.
