How microfinance can help investors keep calm and carry on
The continued spread of coronavirus (Covid-19) has led to rising fears over disrupted supply chains, tourism and global demand. The worries have prompted substantial falls in equity markets while government bond yields have dropped to historic lows.
However, while traditional asset classes have responded quickly, the impact on private markets - and particularly those like microfinance – will take time to assess. The effect will be more nuanced and vary by region, industry and business model.
If you can keep your head…
Importantly, microfinance is historically less correlated with public markets – one of the notable benefits of investing in the asset class is the diversification that it can bring to an investor’s portfolio.
Microfinance investments, especially in emerging and frontier markets, have historically been quite resilient to shocks of this nature, particularly if you look at SARS in 2002, the global financial crisis in 2008 and MERS in 2012.
Stable returns and low correlation – key features of microfinance funds
Cumulative returns of microfinance and other asset classes*
Source: BlueOrchard. *Indexed at 100 for 31 December 2003, based on monthly USD returns 421788
Rural and less connected = less affected
A slowdown in Chinese growth could have knock-on effects for markets that are heavily reliant on China for trade, investment and tourism.
To date, most countries that we invest in have only reported a few cases of Covid-19. When combined with a sharp reduction in international travel caused by the virus, it is possible that the spread in the developing world could remain relatively low, with exposure for investees focused in rural areas with low population density even lower.
That said, as impact investors, BlueOrchard believes that during times of crisis micro entrepreneurs have the greatest need for access to capital, as well as other services to support income generation.
Access to these services unleashes the potential of individuals who may be socially and economically vulnerable, and can help to break the cycle of poverty and oppression, empowering individuals, families and wider communities.
A pragmatic approach
While it is too soon to quantify fully the impact of the virus on our investments, there are some areas that we anticipate will be more significantly affected. So far, we have not identified any significant impacts to the businesses that we invest in, but we are continuing to pay close attention as the situation evolves and allocate investments in our portfolios accordingly.
We have taken steps to reduce the investment level in our microfinance portfolios and further focus on quality names and defensive positioning in our impact bond portfolios.
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