Deutsche Bank Launches New EM FX Indices

Deutsche Bank has launched a new set of foreign exchange indices to track 21 emerging markets currencies, reflecting, the bank says, the growing importance of EM as an asset class.

The set of four new non-tradable foreign exchange indices were developed by Deutsche Bank’s EM research team to help investors more comprehensively track performance of emerging markets currencies. They are the DB EM FX Equally Weighted Spot Index, the DB EM FX Dynamically Weighted Spot Index, the DB EM FX Equally Weighted Total Return Index, and the DB EM FX Dynamically Weighted Total Return Index.

“Asia’s economic growth, particularly China, is tipping the scales of economic influence and changing the investment landscape,” says Deutsche’s global head of EM research, Sameer Goel. “In recent years, emerging markets fixed income assets (credit and currencies) have been growing in volume and prominence, therefore tracking EM FX performance has become more important than ever for investors in emerging markets.”

To accompany the launch, Deutsche’s research team highlight four key aspects of investment growth in emerging markets.

1)   Significant shifts in the relative size of emerging markets from an economic and investment point of view. For example, the inclusion of China in various global bond indices, including the FTSE World Government Bond Index scheduled for later this year. Deutsche Bank strategists expect cumulative global investment inflows of just under USD600bn into China local currency fixed income in the next five years.

2)   Issuance of a growing proportion of government debt in emerging markets in local currency. Total government debt issuance has more than doubled in the last decade, with the majority denominated in local currency.

3)   Growth of benchmarks and passive investing in emerging market debt. The number of countries in benchmark bond indices has grown from 11 to 19 since 2002. Foreign holdings of local currency government bonds in EM have increased from $800 billion in 2004 to almost $2 trillion in 2019. This has increased the need for investors to track EM FX to help with the decision on whether to hedge their currency exposure on underlying bond holdings.

4)   Significant increase in the volume of transacted EM FX. The share of EM in OTC FX turnover has increased from 12% in 2007 to 25% today, particularly in derivatives.

“The new indices track both spot and carry performance of 21 emerging market currencies, serving as a comprehensive set of barometers for EM investors tracking FX,” says Deutsche Bank EM strategist Oliver Harvey. “We developed the new Deutsche Bank EM FX indices to better reflect the growth and development of EM fixed income. The indices capture a much wider currency universe, 21 currencies in total. Indices also reflect transparent and dynamic weights, and both spot and carry performance, since carry is a significant trading strategy for EM investors.”

The bank says the none-tradeable indices are available on Bloomberg terminals, and are designed to track EM currency performance and build on existing EM FX indices by reflecting a wider universe (21 currencies); applying relevant and transparent weights; shifting weight dynamically over time (three years), and capturing both spot and total return performance.