Going Global? Beware Country Risk

02/25/2013 10:30 am EST


Richard Loth of the Fund Investor’s Schoolhouse provides five go-to sources for investors looking to diversify internationally.

Once investors go beyond their own borders, country risk needs to become a substantive consideration. And while this obviously applies to countries worldwide, it is extremely important for investors owning, or planning to own, so-called emerging-market funds to understand the concept of country risk.

Here are five reliable sources of “country information” that are readily available from free Web sites:

1. The CIA’s World Factbook (http://www.cia.gov/library/publications) provides economic statistics, as well as additional information on the history, people, government, geography, communications, transportation, military, and transnational issues, for 267 countries. Here’s a comparison of per-capita GDP (2011 estimate):

USA                       $48,100  
UK                          $35,900
Germany                $37,900
Japan                      $34,000
Brazil                      $11,600
Russia                    $16,700
India                       $ 3,700
China                      $ 8,400

2. The World Bank’s Doing Business (http://www.doingbusiness.org/reports/global-reports/doing-business-2012) ranks 183 countries “on the ease of doing business.”

A fundamental premise is that economic activity requires good rules that establish and clarify property rights and reduce the cost of resolving disputes, and that increase the predictability of economic interactions and provide contractual partners with certainty and protection against abuse.

A high ranking (Singapore ranks number 1) is indicative of an economy with a high level of economic opportunity:

USA                       4            
UK                          7                                                                            
Japan                      20
Brazil                      126
Russia                    120
India                       132
China                      91
Germany                 19          

3. The World Economic Forum’s Global Competitiveness Index Rankings (http://www.weforum.org/), is comprised of 12 “pillars of competitiveness,” and gives 142 countries a ranking and score (Switzerland is ranked No. 1 with a score of 5.74 for the 2011-2012 Index):

USA                       5             5.43        
UK                          10           5.39
Germany                6             5.41
Japan                      9             5.40
Brazil                      53           4.32
Russia                    66           4.21
India                       56           4.30
China                      26           4.90

4. Transparency International (http://www.transparency.org/) is a global non-profit organization with 100 national chapters worldwide. Its Corruption Perceptions Index (CPI) ranks 182 countries annually on the perceived prevalence of corruption within each nation and assigns a ranking and a score based upon its surveys. New Zealand, with a score of 9.5, is ranked No. 1 (the best) in the 2011 CPI:

USA                       24           7.1          
UK                          16           7.8
Germany                14           8.0
Japan                      14           8.0
Brazil                      73           3.8
Russia                    143         2.4
India                       95           3.1
China                      n.a.         n.a.

5. The Index of Economic Freedom (http://www.heritage.org/index/about) is published annually as a collaborative effort by the Heritage Foundation and The Wall Street Journal. As a single source of country risk data, the IEF is probably the best go-to reference for the general investing public interested in foreign markets.

The Index measures ten critical benchmarks that gauge the economic success of 184 countries. The 2012 report ranks Hong Kong No. 1 with a score of 89.9 out of 100. Country rankings and scores below 60 reflect sub-standard Index performance:
USA                       10           76.3        
UK                          14           74.1
Germany                26           71.0
Japan                      22           71.6
Brazil                      99           57.9
Russia                    144          50.5
India                       123          54.6
China                      138          51.2

Albert Einstein is quoted as saying that, “Not everything that counts can be counted.” With the exception of the CIA’s World Factbook, the conclusions of the reports sighted above include a considerable amount of “soft”—i.e. qualitative—judgments.

Nevertheless, all the sponsors of the material presented are respected institutions and their findings are based on high research standards. When it comes to evaluating the attractiveness of emerging markets, the investment community seems to focus its market assessments more on economic and financial figures. While often impressive, they don’t always tell the whole story.

Read more from the Fund Investor's Schoolhouse here...

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