June 15, 2022

Q2 2022 Investment Outlook

Robust demand for capital from micro & SME financial institutions despite geopolitical and inflationary pressures

Prudent Portfolio Management

For the first time in many years, global markets in the developed world are finding themselves in a rising yield environment as the US Federal Reserve winds down quantitative easing and raises interest rates to combat inflation. The economic fallout from the conflict in Ukraine is being felt worldwide amidst rising food and energy prices and disrupted supply chains following the COVID-19 pandemic. Despite these broader forces, MicroVest’s portfolio maintains good sovereign, currency, and pipeline positions and a positive yield outlook.  

Today, MicroVest maintains zero exposure to, and no pipeline for microfinance and SME financial institutions in Russia, Ukraine, or Belarus. We continue to carefully monitor the handful of our portfolio companies with regional ties to these markets. We also remain cautious on countries and regions such as Sub-Saharan Africa, where food insecurity and inflation could have disparate impacts on underlying borrowers. We have and will continue fully hedging against foreign currency risk.  

Rising Interest Rate Environment Increasing Yield

While inflation may cause new challenges, the rising interest rate environment is resulting in an increase in gross yields on MicroVest’s new loans. We have observed this increase in yields in most of our markets. This will have a positive impact on the portfolio yield given the short duration of the loans to our microfinance and SME financial institutions, remaining maturities of 13 months on average. Sustained demand for debt from our portfolio companies adds to this trend.

Balanced Country Allocation

MicroVest’s portfolio remains balanced between Latin America and Asia. Our top 10 Countries by exposure remained relatively stable, with two notable changes, Mexico has fallen out of the top 10 and Brazil has been added.  In Q1 2022, we added Brazil to our 10 Countries by participating in a syndicated loan to an SME bank structured by a multilateral development institution. We remain positive on our two largest country allocations of India and Cambodia where our loan portfolio has not seen any restructurings. India’s economy remains strong despite recent global challenges including inflation. With 8% forecasted GDP growth, India is expected to remain one of the fastest growing economies in the world, and in support of this, Fitch Ratings recently raised its outlook on India to stable citing diminished downside risks to medium-term growth. A variety of growth-oriented reforms and social protection measures to mitigate the impact of COVID on underserved households have enhanced liquidity and financial support to MSMEs, which adds to our positive India outlook. Cambodia’s forecasted GDP growth is 5%; government stimulus is expected to support household spending and a recovery in tourism is likely to support consumption growth.

Top 10 Countries in MicroVest’s Portfolio

% of AUM1 GDP Projections 20222
INDIA18%8%
CAMBODIA7%5%
COLOMBIA7%6%
PANAMA5%8%
ECUADOR5%3%
BRAZIL4%1%
MONGOLIA4%2%
PERU4%3%
GEORGIA4%3%
EL SALVADOR4%3%

Sound Credit Fundamentals Amidst Market Turmoil

Despite broader market forces, we continue to see growth in our portfolio driven by continued robust demand for capital from microentrepreneurs and small businesses in emerging markets. This past quarter we disbursed the second highest volume of loans across our funds since the beginning of 2020, and we expect disbursement volumes to remain high in the coming quarters.

MicroVest remains focused on maintaining high credit quality while pursuing risk-adjusted returns.  As we have noted during previous periods of market turmoil, the MSME end borrowers are frequently hyper-local and continue to supply essential services to their communities regardless of broader global forces. In addition, their impact on the local economies is significant given the employment that they generate.

1Top ten countries in one of MicroVest’s flagship funds as of 3/31/22. Values are calculated as a percentage of net assets in the fund.

2IMF/World Economic Outlook (April 2022) https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/SAU?year=2021

DISCLOSURE INFORMATION

The information contained in this communication has been provided by MicroVest Capital Management, LLC (“MicroVest”) and no representation or warranty, expressed or implied is made by MicroVest as to the accuracy or completeness of the information contained herein. Any forward-looking statements contained herein with respect to MicroVest’s plans and strategies, anticipated capital investments, changes in market conditions, financial projections or any other matters that are not historical facts, are only predictions and estimates regarding future events and circumstances. Market conditions and MicroVest’s actual results may differ materially from the market conditions and results discussed in these statements.

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