What does the Covid-19 pandemic mean for BlueOrchard’s investments?

17/03/2020 Covid-19

Cases of the Covid-19 virus were first reported in Wuhan, China in December 2019. Despite some drastic measures by the Chinese authorities to prevent the spread of the infection, it has spread rapidly. While highly contagious and difficult to contain, the majority of cases have been mild and recovery rates are high.

During the early weeks of the outbreak, the response from financial markets was somewhat muted. However, as the virus has continued to spread, markets have reacted in a more pronounced way to the expected impact on supply chains tourism, and global demand. As Covid-19 becomes more widespread and harder to contain, the impact is likely to increase and may last for longer than initially expected.

While the initial effects for more traditional asset classes have been relatively quick and clear cut, for private markets, and particularly those like microfinance that we invest in, the implications of Covid-19 will likely be more nuanced and vary by region, industry and business model.

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, particularly 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.

covid-19_microfinance-chart_170320

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. As a company, we have restricted travel and participation in events, adopted a split working arrangement, and implemented hygiene best practices and social distancing for those in the office.

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. 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.

Our teams around the world are maintaining open communication with investees to assess the impact of the virus. The BlueOrchard Risk Committee has requested regular updates and will meet more frequently in the coming weeks and months to review and adjust our strategy as circumstances demand.

As an impact investor, we believe that it may be during times of crisis that micro entrepreneurs have the greatest need for access to capital and other services to support income generating activities. 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.