Risk of Foreign Investments
Risk of Investment
Doug Johnson
Argosy University
An investor considering foreign securities for their investment portfolio would perform an analysis of diverse mutual funds, exchanged traded funds (ETFs), along with stocks or bonds traded in the perspective country. As part of the analysis process of selecting foreign securities the investor normally studies the risk-rating/political risk map of the specific country where the investment is being consider (Johnstone, 2010). This document discusses the risk of investment in politically and economically unstable countries, along with providing a few foreign investment suggestions.
Economic and political risks According to (Perry, 2013) there are two types of risk to be considered before procurement of foreign securities. Economic risk and political risk are to be considered for any foreign investment. Economic risk is defined by (Perry, 2013) as a nation’s ability to repay its debt. A country with a strong economy and stable finances will usually be a more reliable investments than an unstable country. Political risk as defined by (Perry, 2013) is related to political decisions a country may make that might result in an investment loss to the investor. Part of the investor’s analysis should be to scan the political environment to determine if the perspective country’s economy could become unfriendly to a foreign investor due to political changes.
Measurement of economic and political risk Moody’s, Standard & Poor’s, and other large rating agencies publish reports on the credit ratings of countries based on the nation’s ability to repay their debt. The higher the rankings from these countries, the safer an investment in these realms is considered to be. In addition to researching a country’s credit rating, a potential investor would want to examine the country’s gross domestic product, inflation rate, and Consumer Price Index. These metrics are indications of a country’s
Doug Johnson
Argosy University
An investor considering foreign securities for their investment portfolio would perform an analysis of diverse mutual funds, exchanged traded funds (ETFs), along with stocks or bonds traded in the perspective country. As part of the analysis process of selecting foreign securities the investor normally studies the risk-rating/political risk map of the specific country where the investment is being consider (Johnstone, 2010). This document discusses the risk of investment in politically and economically unstable countries, along with providing a few foreign investment suggestions.
Economic and political risks According to (Perry, 2013) there are two types of risk to be considered before procurement of foreign securities. Economic risk and political risk are to be considered for any foreign investment. Economic risk is defined by (Perry, 2013) as a nation’s ability to repay its debt. A country with a strong economy and stable finances will usually be a more reliable investments than an unstable country. Political risk as defined by (Perry, 2013) is related to political decisions a country may make that might result in an investment loss to the investor. Part of the investor’s analysis should be to scan the political environment to determine if the perspective country’s economy could become unfriendly to a foreign investor due to political changes.
Measurement of economic and political risk Moody’s, Standard & Poor’s, and other large rating agencies publish reports on the credit ratings of countries based on the nation’s ability to repay their debt. The higher the rankings from these countries, the safer an investment in these realms is considered to be. In addition to researching a country’s credit rating, a potential investor would want to examine the country’s gross domestic product, inflation rate, and Consumer Price Index. These metrics are indications of a country’s
References: Bremmer, I., (2005). Managing risk in an unstable world. Havard Business Review. Retrieved from http://hbr.org/2005/06/managing-risk-in-an-unstable-world/ar/1 Johnstone, M.,(2010). The 17th annual political risk map. Continuity Central. Retrieved from http://www.continuitycentral.com/news04977.html Perry, B., (2013). Evaluating country risk for international investing. Investopedia. Retrieved from http://www.continuitycentral.com/news04977.html Shriber, T., (2010). Watch out for these 10 ETFs with high political risk. Investment answers. Retrieved from http://www.investinganswers.com/investment-ideas/mutual-funds-etfs/watch-out-these-10-etfs-high-political-risk-1193 Sun Life Financial, (2005). The new wide world of investments. Sun Life Financials, Toronto, ON M5V 3C5