Emerging market bonds are suffering a crisis of visibility, leaving potential passive investors in the dark and intensifying outflow risk by concentrating investment in a small portion of available equities, according to the Financial Times. Despite the fact that asset managers have been unanimous in their praise and bullish outlook on EM equities, only 13% of EM sovereign and corporate bonds are included in major indices, meaning that the majority of EM equities remain off the radar for passive investors and exchange traded funds, a report by EM-focused research house Ashmore found.

Local currency corporate EM bonds are a particular blind spot, with only 2% of the estimated USD 12.5 tn in issuances in 2019 included in the ICE BofA Diversified Local EM Non-Sovereign Index. Local currency government bonds fared slightly better, with 11% inclusion on JPMorgan’s GBI EM Global Diversified index. Egypt could potentially be joining JPMorgan’s index soon along with Ukraine, India, Nigeria, and Serbia.

This funneling of investments is creating a double edged risk: A lack of diversification could leave EM investors with portfolios susceptible to sudden shifts, while a concentration of investments into a narrow segment of the market leaves those markets vulnerable to potential outflows knocking out their economy. (Remember the emerging markets zombie apocalypse of 2018? Or the rush of outflows from emerging markets at the outset of the pandemic last year?)

The (sort of) good news: Overall inclusion is up to 13% in 2020 from 9% in 2018, though that jump is mostly attributable to China’s inclusion in the major fixed income EM indices. And while the main indices are not entirely inclusive of their representation, they do cover more than 200 individual markets, resulting in a geographically spread out representation.