Country Risks
When investing internationally it may be helpful to understand the top level country risk factors other than market specific risk factors. With that in mind, we analyzed the five country risk factors published by The Economist Intelligence Unit to come up with an overall risk factor for each country.
The country risk factors criteria are:
- currency risk
- sovereign risk (default risk on gov’t bonds)
- political risk
- banking risk
- economic structure risk.
The table below positions developed market countries, emerging market countries, and frontier market countries on a vertical risk scale (lower risk on top and higher risk on the bottom).
The list of companies includes the MSCI Frontier Markets index, the MSCI Emerging Markets index and several prominent developed markets countries.
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There is major overlap of country risks between emerging and frontier market country risks, and some overlap with developed market countries.
It is important to note that country risk is not the same as country fund risk, although the more domestic are the companies in a country fund, the more likely it is that country risk is relevant to that country fund’s investment risk.
Country funds dominated by regional and global companies have investment risk profiles that are less like the risk profile of their domicile countries.
For example, the investment risk of a US large-cap country fund is less impacted by US country risk than a Vietnam country fund would be impacted by Vietnam country risk. That is because the global companies that dominate the US large-cap group have globally dispersed operations, capital, materials and employee sources and product sales. The companies that make up the holdings of smaller, less developed countries are far more localized in all aspects of their business and are therefore more subject to local country risk.
While country risk does not directly translate into country investment fund risk, it is useful background information to take into overall consideration when investing in individual country funds.
Richard Shaw
QVM Group LLC