The world is a big place – there are over 190 countries and 7 billion people in the world, which really boggles the mind if you sit down and think about it. In addition to being an interesting intellectual exercise, this fact can also have broad implications for your investments and your financial future. It is easy to stay focused on U.S. firms, news, and events during the day-to-day grind, but it is always important to be aware of your surroundings – especially when it comes to your investments. With that in mind, this series of articles will focus on countries and investment opportunities outside the United States that you might not usually hear about.
As always, be sure to consult a financial services professional familiar with both the potential investment and your unique financial situation before embarking on any investment program.
Political Risk
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Investing abroad, or putting money to work in firms that invest abroad or have significant operations overseas, adds an additional layer of risk. Some of the most common pitfalls that are related to political risk in international investing revolve around labor laws, environmental regulations, businesses practices, and cultural norms. These pitfalls are very real, can have large bottom line impact, and can dramatically impact investment returns. Corporations routinely disclose these risks and the impact that they have on operations, financial performance, and how these events are driving financial decision making.
There is, however, one area of risk that is not always as carefully analyzed — political risk and currency risk.
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Obviously, political risk is evident if there is an overthrow of the current administration, but political risk can manifest itself in other ways as well. Changes to regulations and different political parties manifesting different economic views are among the other ways in which government can influence the business environment in dramatic ways. Additionally, if the central bank (which ideally is independent from the central government, but this is not always the case) undertakes an aggressive policy with regards to the currency, this can also have an impact on earnings potential.
How do firms try and manage these external, and uncontrollable, risks?
Something to think about!
Happy Reading!
