RISK IN FOREIGN INVESTMENT

Risk in Foreign Investment

Risk in Foreign Investment

Introduction

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 paper introduces the concept of risk in investing in a particular country and how they are analyzed by investors.

The following investments in a foreign country must take into account two main sources of risk are considered.

• Economic: This risk refers to the ability of the country to pay its debts. A country with a strong economy and stable financial investment is a more reliable option than a weak economy; a country with financial or economic deficit.

• Political risk: The risk for investors that unexpected losses related to political decisions can cause within a country. Economic risk is usually referred to as a country's ability to pay down debt, but the political risk, sometimes refers to pay off debts in a friendly climate of foreign investment designated to a certain project. Investors outside of the political climate (hostile or make) can forsee, even if a country's economy is strong. This generally shpws that country is not a good candidate for investment.

So do the country like U.S., you will receive credit score to your ability to determine and pay its debts. In fact, almost all countries in the world, Moody's, Standard & Poor's (S & P) or other bodies of great features are investment giants. A country is considered to be in a higher credit rating and if these risks are minimal and have a safe investment climate. A review of the creditworthiness of the country is a great way to start analyzing potential investments.

Theory vs. practice

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 ...