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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):
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:
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.
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