In the wake of the COVID-19 crisis, the DOW has had is largest and second largest drops in it’s history. Investors are bracing themselves for an economic recession, but are finding it hard to keep their money safe. Stocks are too uncertain to hold, reserve bonds have just hit the lowest return in it’s history, and even cash isn’t safe due to the high likelihood of inflation. The question becomes, are there any safe places left to protect your money?
Despite the perceived psychological risk of lending to microfinance institutions, they have a track record of doing very well during times like this. The main reason why is because their assets are loans given to people in developing nations whose lives are completely uncorrelated to what’s happening in the global economy— ie. A farmer in Uganda isn’t going to see lower crop yield because restaurants in NYC are shutting down.
The 2008 Great Recession is a perfect example of how resilient Microfinance Investments are while the rest of the world seems to be crashing down. From the time of the crash to the five year period afterwards, microfinance investments outperformed stocks, money markets, commodities, and hedge funds. The only major world index to exceed the returns of Microfinance Investments was the JPM Hedged USD GBI Global (bonds).
Abhijit V Banderjee, Development Economics professor at MIT and author of "Poor Economics” explains this phenomenon very simply. “Paradoxically, events that are perceived to be cataclysmic in rich countries often seem to barely register with them [microcredit borrowers]”.
In fact at the the lowest point of the recession in 2009, the World Bank president, Robert Zoellick, wrongly warned world leaders that “The global economic crisis, threatens to become a human crisis in many developing countries unless they can take largest measure to protect vulnerable people in their communities”.
In order to verify that claim, the New York Times sent Somini Sengupta, their correspondent in India, to research what the World Bank president assured them would be a complete meltdown in the slums of India. Her interviews with locals went something like this, “‘Are there jobs in the city?' Sengupta would ask. Yes, lots of jobs. ‘Have you heard of cutbacks?’ No, no cutback in Mumbai, things are great. And so on” (Poor Economics). After a failed attempt to write a story about how the poor in India were affected, she gave up on the task and went home.
Her research study taught us two things, first of all it demonstrated how life is already so hard for the poor, that every day feels like a financial crisis. The second thing that it demonstrated was that most poor people are so cut off from the global economy that microfinance investments are completely uncorrelated to the global economy.
In a time where everything is falling apart and you’re seeking a stable investment return, microfinance investments are a great way to mitigate that risk. If you’re an accredited investor trying to figure out how to protect your assets, email us, and ask about the new investment tools we’ve created in order to help you keep your money safe for the next few months while the world economy remains turbulent.