The Sources of Risk in Stock Investing

Total Risk = Unsystematic Risk + Systematic Risk

Unsystematic Risk (diversifiable)
Business Risk
Financial Risk

Systematic Risk (nondiversifiable)
Market Risk
Interest Rate Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk

The Sources of Risk in Stock Investing

Total Risk = Unsystematic Risk + Systematic Risk

Unsystematic Risk (diversifiable)
Business Risk
Financial Risk

Systematic Risk (nondiversifiable)
Market Risk
Interest Rate Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk

Basic Knowledge for International Investing

Evaluating Country Risk For International Investing
http://myinvestingnotes.blogspot.com/2009/12/evaluating-country-risk-for.html

Malaysia's economy stagnant, needs reform
http://myinvestingnotes.blogspot.com/2009/12/malaysias-economy-stagnant-needs-reform.html


Economics Basics: What Is Economics?
http://myinvestingnotes.blogspot.com/2009/12/economics-basics-what-is-economics.html

What is GDP and why is it so important?
http://myinvestingnotes.blogspot.com/2009/12/what-is-gdp-and-why-is-it-so-important.html

What Is The Balance Of Payments?
http://myinvestingnotes.blogspot.com/2009/12/what-is-balance-of-payments.html

Understanding The Current Account In The Balance Of Payments
http://myinvestingnotes.blogspot.com/2009/12/understanding-current-account-in.html

Current Account Deficits: Government Investment Or Irresponsibility?
http://myinvestingnotes.blogspot.com/2009/12/current-account-deficits-government.html

What is a trade deficit and what effect will it have on the stock market?
http://myinvestingnotes.blogspot.com/2009/12/what-is-trade-deficit-and-what-effect.html


What is RISK? Equity investment is the most risky investment in all the financial markets.
http://myinvestingnotes.blogspot.com/2009/12/what-is-risk-equity-investment-is-most.html

Evaluating Country Risk For International Investing

Evaluating Country Risk For International Investing

 

by Brian Perry

 

Many investors choose to place a portion of their portfolios in foreign securities. This decision involves an analysis of various mutual funds, exchange-traded funds (ETF), or stock and bond offerings. However, investors often neglect an important first step in the process of international investing. When done properly, the decision to invest overseas begins with a determination of the riskiness of the investment climate in the country under consideration. Country risk refers to the economic, political and business risks that are unique to a specific country, and that might result in unexpected investment losses. This article will examine the concept of country risk and how it can be analyzed by investors. (For more, read Finding Fortune In Foreign-Stock ETFs.)

 

Economic and Political Risk
The following are two main sources of risk that need be considered when investing in a foreign country.

 

•Economic risk: This risk refers to a country's ability to pay back its debts. A country with stable finances and a stronger economy should provide more reliable investments than a country with weaker finances or an unsound economy.
•Political risk: This risk refers to the political decisions made within a country that might result in an unanticipated loss to investors. While economic risk is often referred to as a country's ability to pay back its debts, political risk is sometimes referred to as the willingness of a country to pay debts or maintain a hospitable climate for outside investment. Even if a country's economy is strong, if the political climate is unfriendly (or becomes unfriendly) to outside investors, the country may not be a good candidate for investment.

 

Measuring Economic and Political Risk

 

Just as corporations in the U.S. receive credit ratings to determine their ability to repay their debt, so do countries. In fact, virtually every investable country in the world receives ratings from Moody's, Standard & Poor's (S&P), or the other large rating agencies.

• A country with a higher credit rating is considered a safer investment than a country with a lower credit rating.
• Examining the credit ratings of a country is an excellent way to begin the analysis of a potential investment.

 

Another important step in deciding on an investment is to examine a country's economic and financial fundamentals.

• Different analysts prefer different measures, but almost everyone looks at a country's gross domestic product (GDP), inflation and Consumer Price Index (CPI) readings when considering an investment.
• Investors will also want to carefully evaluate the structure of the country's financial markets, the availability of attractive investment alternatives, and the recent performance of local stock and bond markets.
• (For more insight, see The Consumer Price Index: A Friend To Investors and The Importance Of Inflation And GDP.)

 

Sources of Information on Country Risk
There are many excellent sources of information on the economic and political climate of foreign countries.

• Newspapers, such as the New York Times, the Wall Street Journal and the Financial Times dedicate significant coverage to overseas events.
• There are also many excellent weekly magazines covering international economics and politics; the Economist is generally considered to be the standard bearer among weekly publications.

  

For those seeking more in-depth coverage of a particular country or region, two excellent sources of objective, comprehensive country information are the Economist Intelligence Unit and the Central Intelligence Agency (CIA) World Fact Book.

• Either of these resources provides an investor with a broad overview of the economic, political, demographic and social climate of a country.
• The Economist Intelligence Unit also provides ratings for most of the world's countries. These ratings can be used to supplement those issued by Moody's, S&P, and the other "traditional" ratings agencies.

 

Finally, the internet provides access to a host of information, including international editions of many foreign newspapers and magazines. Reviewing locally produced news sources can sometimes provide a different perspective on the attractiveness of a country under consideration for investment.

 

Developed Markets, Emerging Markets and Frontier Markets
When considering international investments, there are three types of markets from which to choose.

 

•Developed markets consist of the largest, most industrialized economies.

 

1. Their economic systems are well developed, they are politically stable, and the rule of law is well entrenched.
2. Developed markets are usually considered the safest investment destinations, but their economic growth rates often trail those of countries in an earlier stage of development.
3. Investment analysis of developed markets usually concentrates on the current economic and market cycles; political considerations are often a less important consideration.
4. Examples of developed markets include the U.S., Canada, France, Japan and Australia.

 

•Emerging markets experience rapid industrialization and often demonstrate extremely high levels of economic growth.

1. This strong economic growth can sometimes translate into investment returns that are superior to those that are available in developed markets.
2. However, emerging markets are also riskier than developed markets; there is often more political uncertainty in emerging markets, and their economies may be more prone to excessive booms and busts.
3. In addition to carefully evaluating an emerging market's economic and financial fundamentals, investors should pay close attention to the country's political climate and the potential for unexpected political developments.
4. Many of the fastest growing economies in the world, including China, India and Brazil, are considered emerging markets. (For related reading, see What Is An Emerging Market Economy?)

 

 

•Frontier markets represent "the next wave" of investment destinations.

1. Frontier markets are generally either smaller than traditional emerging markets, or are found in countries that place restrictions on the ability of foreigners to invest.
2. Although frontier markets can be exceptionally risky and often suffer from low levels of liquidity, they also offer the potential for above average returns over time.
3. Frontier markets are also not well correlated with other, more traditional investment destinations, which mean that they provide additional diversification benefits when held in a well-rounded investment portfolio.
4. As with emerging markets, investors in frontier markets must pay careful attention to the political environment, as well as to economic and financial developments.
5. Examples of frontier markets include Nigeria, Botswana and Kuwait.

 

Important Steps When Investing Overseas

 

Once country analysis has been completed, there are several investment decisions that need to be made. The first choice is to decide where to invest, by choosing among several possible investment approaches, including:

 

•Investing in a broad international portfolio
•Investing in a more limited portfolio focused on either emerging markets or developed markets
•Investing in a specific region, such as Europe or Latin America
•Investing only in a specific country(s)

 

It is important to remember that diversification, which is a fundamental principle of domestic investing, is even more important when investing internationally.

 

• Choosing to invest an entire portfolio in a single country is not prudent. In a broadly diversified global portfolio, investments should be allocated among developed, emerging and perhaps frontier markets.
• Even in a more concentrated portfolio, investments should still be spread among several countries in order to maximize diversification and minimize risk.

 

After the decision on where to invest has been made, an investor has to decide what investment vehicles he or she wishes to invest in.

• Investment options include sovereign debt, stocks or bonds of companies domiciled in the country(s) chosen, stocks or bonds of a U.S.-based company that derives a significant portion of its revenues from the country(s) selected, or an internationally focused exchange-traded fund (ETF) or mutual fund.
• The choice of investment vehicle is dependent upon each investor's individual knowledge, experience, risk profile and return objectives.
• When in doubt, it may make sense to start out by taking less risk; more risk can always be added to the portfolio at a later date.

 

In addition to thoroughly researching prospective investments, an international investor also needs to monitor his or her portfolio and adjust holdings as conditions dictate.

• As in the U.S., economic conditions overseas are constantly evolving, and political situations abroad can change quickly, particularly in emerging or frontier markets.
• Situations that once seemed promising may no longer be so, and countries that once seemed too risky might now be viable investment candidates.

 

Conclusion

 

• Overseas investing involves a careful analysis of the economic, political and business risks that might result in unexpected investment losses.
• This analysis of country risk is a fundamental step in the process of building and monitoring an international portfolio.
• Investors that use the many excellent sources of information available to evaluate country risk will be better prepared when constructing their international portfolios.

 

For more on investing internationally, read Going International.
by Brian Perry, (Contact Author | Biography)

 

Brian Perry is vice president and investment strategist at an asset management firm and an accomplished author and public speaker. He has published several articles and is a frequent presenter for several professional associations. Brian received a bachelor of science degree in finance from Villanova University in 1996, an MBA in International Business from National University in 2006, and is pursuing a master's degree in international affairs from Tufts University. Brian is also a candidate in the chartered financial analyst (CFA) program, has previously held Series 7 and 63 securities licenses, and taught an introductory class on investing at the International Center in New York City.

 

http://www.investopedia.com/articles/stocks/08/country-risk-for-international-investing.asp

Country risk - Emerging economies caught in the storm

Country risk - Emerging economies caught in the storm

<<
- The global crisis is affecting emerging country risk
- The crisis has revealed their vulnerabilities, but with contrasting situations
- Analysis of risk in Russia, Turkey and India >>

Some countries are in a better position than others to face the crisis. Some countries have resources and structures that offer more shelter from the global crisis: Singapore (rated AA), Chile (A), Czech Republic (A), HongKong (A), Malaysia (A), Slovenia (A), Taiwan (A), Bahrain (BB), Botswana (BB),Brazil (BB), Israel (BB), South Korea (BB), Kuwait (BB), Mexico (BB), Oman(BB), Poland (BB), Qatar (BB), Saudi Arabia (BB), Slovakia (BB), South Africa(BB), Thailand (BB) and Tunisia (BB).


PARIS, Jan. 15 /CNW Telbec/ -

Euler Hermes has published its analysis of country risk in a global economic crisis. Country risk takes on another dimension in a recessionary environment. Emerging countries are faced with dwindling sources of external financing, the recession of the major economies and falling commodities prices. These difficulties have been exacerbated by bank liquidity problems, volatile exchange rates and the withdrawal of foreign capital. These economies' weaknesses, less visible during growth periods, have resurfaced. Countries that seemed perfectly safe a short while ago now represent a risk for the companies that do business with them.

Against this backdrop, Euler Hermes Country Risk Analyst David Atkinson said: "The present economic crisis is affecting all countries, with no exception. Although some countries are in a better position to resist the crisis, many are experiencing a rapid deterioration in their situation. It is essential that trade partners and exporters keep a close watch on these countries, on the reforms implemented and on future trends".

Emerging economies are slowing

Euler Hermes is forecasting growth of less than 1% for the global economy in 2009 with the large developed economies experiencing their first recession since World War II. At the same time, emerging economies are being severely hurt by a world crisis that does not correspond to a normal economic cycle.

The decoupling theory, whereby emerging economies would continue to grow, has
been largely invalidated. These countries now face numerous problems:
<< - Wide-scale withdrawal of foreign investment
- Drop in exports
- Tumbling commodities prices (oil, etc.)

Against this difficult background, Euler Hermes expects economic growth to slow sharply in emerging countries.
-----------------------------------------------------
Regional real GDP 2003-2006/ 2007/ 2008/ 2009
(% change) annual Euler Hermes Euler Hermes
average projections projections
-------------------------------------------------------------------------
Emerging Europe 6.8/ 7.0/ 5.4/ 2.0
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Russia 7.1/ 8.1/ 6.1/ 1.5
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Turkey 7.5/ 4.5/ 2.3/ 1.0
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Emerging Asia 8.4/ 9.2/ 7.1/ 5.0
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China 10.5/ 11.9/ 9.2/ 7.0
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India 8.7/ 9.0/ 7.0/ 5.0
-------------------------------------------------------------------------
Latin America 4.6/ 5.5/ 4.6/ 1.9
-------------------------------------------------------------------------
Brazil 3.4/ 5.1/ 5.5/ 2.3
-------------------------------------------------------------------------
Mexico 3.3/ 3.3/ 2.0/ 0.0
-------------------------------------------------------------------------
Middle East & Africa 5.8/ 5.7/ 5.9/ 4.6
-------------------------------------------------------------------------

A growing number of high-risk countries
The overall trend in the risk ratings assigned by Euler Hermes to each country (see methodology) reflects the general trend in risk of international trade. With the risk ratings of 16 countries downgraded in 2008, international trade has entered a more turbulent period.
---------------------------
Net Country Grade Changes
---------------------------
2000 -1
2001 -5
2002 -8
2003 +3
2004 +11
2005 +1
2006 -1
2007 +3
2008 -16
---------------------------
At the individual level, each country's rating reflects its sensitivity to a downturn in its environment and its capacity to stand firm. In the present conditions, individual country risk ratings can change rapidly and should therefore be monitored closely by exporters and their partners. Since the economic crisis worsened, Euler Hermes has downgraded the country risk ratings of eleven countries:
----------------------------------
Grade Change
----------------------------------
South Korea A to BB
----------------------------------
Hungary B to C
----------------------------------
Romania B to C
----------------------------------
Bulgaria B to C
----------------------------------
Lithuania B to C
----------------------------------
Guatemala B to C
----------------------------------
Jordan B to C
----------------------------------
Iceland A to D
----------------------------------
Argentina C to D
----------------------------------
Pakistan C to D
----------------------------------
Vietnam C to D
----------------------------------
Euler Hermes has identified a group of more vulnerable countries:
- With a C rating: Hungary, Romania, Russia, Turkey, Lithuania, Bulgaria, Latvia, Kazakhstan, Indonesia, Dominican Republic, Honduras and Jamaica
- With a D rating: Iceland, Ukraine, Serbia, Bosnia Herzegovina, Vietnam, Argentina, Venezuela, Ecuador, Kenya, Lebanon and Pakistan
>>

Some countries are in a better position than others to face the crisis:
Some countries have resources and structures that offer more shelter from the global crisis: Singapore (rated AA), Chile (A), Czech Republic (A), Hong Kong (A), Malaysia (A), Slovenia (A), Taiwan (A), Bahrain (BB), Botswana (BB), Brazil (BB), Israel (BB), South Korea (BB), Kuwait (BB), Mexico (BB), Oman (BB), Poland (BB), Qatar (BB), Saudi Arabia (BB), Slovakia (BB), South Africa (BB), Thailand (BB) and Tunisia (BB).

Russia: liquidity crunch and tumbling oil prices
Russia's economic growth is expected to slow significantly, from 6.1% in 2008 to 1.5% in 2009 according to Euler Hermes estimates, after several strong years (7.4% in 2006 and 8.1% in 2007).

The rapid slowdown was visible in the fourth quarter of 2008 with a very sharp fall in industrial production.

The business slowdown has been accompanied by a slump in the share prices of listed Russian companies (down 70% in six months) and the weakening of the rouble, down 13% against the dollar, despite heavy intervention.

Foreign exchange reserves have decreased by more than 25% since August 2008 and the fall in the price of oil will have a significant impact on the fiscal and external current account balances.

Euler Hermes has left its C rating unchanged but notes the risks from banking and corporate foreign exchange illiquidity and lower oil prices.

Turkey: strong inflation and low foreign exchange reserves
Turkey's economic growth has slowed significantly since 2007 (6.9% in 2006, 4.5% in 2007). Euler Hermes is expecting economic growth to stand at 2.3% in 2008 and fall to 1.0% in 2009.

Inflation remains relatively high. Euler Hermes estimates that the inflation rate will have risen to 10.1% in 2008 and remain at a similar level in 2009 (10%).

The large current account deficit and reliance on short time capital flows is a key vulnerability and the Turkish Lira has fallen sharply.

Foreign exchange reserves have also fallen but currently still cover 3.5 months of imports, though only 60% of external debt due in 2009.

Euler Hermes has left its C rating unchanged but is closely monitoring the situation, including developments with regards to the IMF programme currently under discussion.

India: substantial foreign exchange reserves but limited possibilities
India recorded a sharp downturn in industrial activity in the fourth quarter of 2008.

The banking sector has been relatively sheltered from the global financial crisis directly though credit conditions have tightened noticeably.

The Indian stock market and exchange rates have also been affected. Economic growth has slowed significantly but remains relatively high in the global context (7.0% in 2008 and 5.0% in 2009 according to Euler Hermes forecasts).

Government support for the currency have significantly decreased into foreign exchange reserves but these still cover seven months of imports and the total stock of external debt.

However, the size of the fiscal deficit considerably constraints government action to offset the slowdown in economic activity.

Euler Hermes has maintained its B rating. Regional and political uncertainties will also need to be monitored.

#################################

Technical details

Methodology

Euler Hermes assigns each country a risk rating that reflects thecountry's economic and political risk. The economic factors taken into accountare the macroeconomic indicators (indebtedness, fiscal deficit, etc) andinstitutional and structural factors. The political factors taken into accountare the efficiency and stability of the political system in place. Thecombination of these two types of indicators are reflected in a rating - AA,A, BB, B, C or D; AA is the strongest rating. This classification constitutesa first filter for any credit limit request and influences the terms andconditions of cover extended by Euler Hermes.

Euler Hermes country risk analysis

Euler Hermes country risk analysisThree Euler Hermes specialists, two in London and one in Hamburg, arededicated to country risk. A country risk committee, which also includesrepresentative of group subsidiaries, meets every two months. The country riskspecialists' work is published in a weekly bulletin. Any change in a country'srisk results in an immediate, ad hoc review.

David Atkinson is one of Euler Hermes' three country risk analysts. Hejoined the group in 1999 and and has established a Group-wide framework forcountry risk analysis. Previously, David spent twenty-five years ininternational banking as an emerging markets and country risk analyst,specialising in Latin America, Eastern and Southern Europe and East Asiaincluding China. David is based in the United Kingdom and holds a degree inEconomics from the University of Nottingham.
-------------------------------------------------------------------------

Euler Hermes is the worldwide leader in credit insurance and one of theleaders in the areas of bonding, guarantees and collections. With 6,000employees in over 50 countries, Euler Hermes offers a complete range ofservices for the management of B-to-B trade receivables and posted aconsolidated turnover of (euro) 2.1 billion in 2007.

Euler Hermes has developed a credit intelligence network that enables itto analyse the financial stability of 40 million businesses across theglobe. The group protectsworldwide business transactions totalling(euro) 800 billion.

Euler Hermes, subsidiary of AGF and a member of the Allianz group, islisted on Euronext Paris. The group and its principal credit insurancesubsidiaries are rated AA- by Standard & Poor's. http://www.eulerhermes.com/

-------------------------------------------------------------------------

These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of thestatements contained herein may be statements of future expectations and otherforward-looking statements that are based on management's current views andassumptions and involve known and unknown risks and uncertainties that couldcause actual results, performance or events to differ materially from thoseexpressed or implied in such statements. In addition to statements which areforward-looking by reason of context, the words "may, will, should, expects,plans, intends, anticipates, believes, estimates, predicts, potential, orcontinue" and similar expressions identify forward-looking statements. Actualresults, performance or events may differ materially from those in suchstatements due to, without limitation, (i) general economic conditions,including in particular economic conditions in the Allianz SE's core businessand core markets, (ii) performance of financial markets, including emergingmarkets, (iii) the frequency and severity of insured loss events, (iv)mortality and morbidity levels and trends, (v) persistency levels, (vi) theextent of credit defaults (vii) interest rate levels, (viii) currency exchangerates including the Euro-U.S. Dollar exchange rate, (ix) changing levels ofcompetition, (*) changes in laws and regulations, including monetary convergenceand the European Monetary Union, (xi) changes in the policies of central banksand/or foreign governments, (xii) the impact of acquisitions, includingrelated integration issues, (xiii) reorganization measures and (xiv) generalcompetitive factors, in each case on a local, regional, national and/or globalbasis. Many of these factors may be more likely to occur, or more pronounced,as a result of terrorist activities and their consequences. The mattersdiscussed herein may also involve risks and uncertainties described from timeto time in Allianz SE's filings with the U.S. Securities and ExchangeCommission. The Group assumes no obligation to update any forward-lookinginformation contained herein.


For further information: Press relations/Euler Hermes group: Raphaele Hamel, +33 (0)1 4070 8133, raphaele.hamel@eulerhermes.com; Agence Rumeur Publique: Salima Ait Meziane, +33 (0)1 5574 5223, salima@rumeurpublique.fr
EULER HERMES CANADA - More on this organization

http://www.newswire.ca/en/releases/archive/January2009/15/c8011.html

Assessing Investment Risks using B-FLExCo

This is how I assess investment risks of the companies that I wish to invest in. I have shortened this to B-FLExCo.

This abbreviation stands for:

B = Business risk
F = Financial risk
L = Liquidity risk
Ex = Exchange risk
Co = Country risk (Also, known as political risk)

At the moment, there is significant political risk for those investing in the KLSE. Accordingly, many KLSE counters are trading at a discount reflecting this risk and other prevailing risks.