What is Country risk? (also known as Global Investment risk and International Investment risk)
The risk that you will suffer a loss investing in a foreign country due to something about that country that doesn’t exist or occur in the United States. This can involve anything from economic and political instability to the lack of investor protections.
How this risk plays out in the real world
Aug 27, 2021: China Clamps Down On Large Companies, Excessive ‘996’ Work Culture And Powerful Business People To Keep Control
Apr 20, 2017: GM says Venezuela has seized its car plant
Jul 12, 2016: Venezuela seizes Kimberly-Clark plant as country plunges deeper into crisis
Sep 22, 2014: Clorox pulls operations out of Venezuela because of government restrictions, supply disruptions
Mar 10, 2014: For Fedex in China, It’s Hurry Up and Wait
Nov 12, 2013: Venezuela bonds sink after Maduro moves against retailers
Apr 18, 2012: YPF shares plummet on Argentina takeover bid
Dec 02, 2011: Venezuela signs on US$600m compensation to Cemex
Oct 19, 2011: Foreign Firm’s Feel China’s Heat
Sep 30, 2011: Chávez finishes nationalizing Venezuela oil
Dec 30, 2010: Mikhail Khodorkovsky gets six more years in Russia jail
Mar 22, 2010: Google Refuses to Keep Censoring Chinese Content
Jun 01, 2009: Son of top Russian oil executive kidnapped – paper
Connection to other risks
When investors refer to the exchange of their dollars into the local currency at the time of the investment, and the reverse when they sell it, there is a chance that the exchange rate went in a negative direction. This specific issue is called Currency risk.
How investors can manage Country risk
- If you want to venture outside of the US to make direct investments in specific corporations, stick with those that are based in the most advanced democracies, such as England, Germany, Japan and Canada. Keep in mind that you can already effectively purchase the shares of many of the biggest foreign corporations because they are traded on U.S. markets. Examples include Toyota (NYSE: TM) and Nestle (NSRGY).
- Successful investing often involves finding countries and regions that are developing, allowing you to “get in on the ground floor”. This is best left up to the professionals, who have the ability to visit these places and personally evaluate opportunities. You can invest in these countries by purchasing region-specific mutual funds such as Fidelity’s Emerging Asia fund (symbol FSEAX) which, among other investments, owns corporations based in small economies such as Malaysia and Indonesia.
A final word
It is truly stunning that in less than a decade that the United States, the country which supposedly is the most business friendly and has the most extensive investor protections, would have its markets suffer two historic market meltdowns.
The first was the 2001 plunge of (primarily technology) stocks which was attributed to the popping of an extreme bubble in the value of Internet and technology stocks. The 2008 plunge was brought on by the bursting of a housing bubble that was enabled by irresponsible lending by banks. The point is that even in a place such as the United States, where everything seems to be set up for investors to have an excellent opportunity to build wealth through investing, nothing is assured.