If your teenage son or daughter said they were about to embark on a three month backpacking holiday around the USA you may feel a bit worried. But the apprehension would be nothing compared with if they instead planned to backpack through North Korea. The reason you would be far more concerned is because of the extra risk your child would potentially be exposing themselves to.
This isn’t just a concern for holiday makers, it is also a concern for investors. The collection of risks associated with investing in a foreign country is commonly referred to as country risk. Country risk includes things such as political risk, exchange rate risk, economic risk and sovereign risk. Because country risk can reduce the expected return on an investment it must be taken into account. When investing in companies that have operations in foreign countries, generally speaking the USA is considered the benchmark for low country risk and most countries have their risk measured in comparison to the USA.
A recent example of an Australian company that suffered from country risk due to their overseas operations is packaging manufacturer Amcor, which has operations in South America – Venezuela. The Venezuelan economy is forecast to contract by 8 percent, with inflation tipped to rise over 700 percent. Amcor was this month forced to downgrade their expected profit and write off the value of it’s entire Venezuelan Operations – more than $450 million. This turn of events is expected to be a catalyst for other companies on how they are managing country risk for operations they may have in unstable regions.