It is not easy to invest abroad due to lack of experience, familiarity with the country, and amount of information: here are the useful tools to get organized.
Investing abroad can be a great opportunity to diversify your portfolio and seize opportunities in growing markets. However, like any major financial decision, planning carefully, doing thorough research, and using the right tools is essential. Not only to calculate the investment risk but also to evaluate when and how to invest to have a greater return on investment (ROI).
At the same time, however, many find it difficult to invest abroad due to a lack of experience, familiarity with the foreign country, and the excessive amount of information to analyze.
Here, then, is how to "alleviate" some of these difficulties through 5 tools to understand how to invest more easily by investigating the degree of risk on the fundamental indicators of a country. To invest internationally, but successfully.
How Do You Measure Country Investment Risk?
Analyzing sovereign risk factors is beneficial to both equity and bond investors, but is perhaps more directly useful to bond investors.
When investing in the stock of specific companies within a foreign country, a country sovereign risk analysis can help create a coherent macroeconomic picture of the operating environment, but most of the research and analysis should be done at the company level.
On the other hand, if you are investing directly in government bonds, assessing the economic condition and strength of the country can be a good way to assess the potential of investing in bonds.
After all, the underlying strength of a government bond is closely tied to the country itself and its ability to grow and generate revenue. Often, the most common method used by investors, with limited time and resources that do not allow them to do an in-depth analysis, is to rely on experts who spend all their time doing this type of analysis.
That is, calculating debt-to-debt service ratios, import/export ratios, money supply changes, and all the other fundamentals of a country, and trying to fit them all into a big picture requires a significant effort if you decide to do it yourself.
Therefore, it is recommended to focus instead on a set of easy-to-understand (and accessible) tools. Here are what they are, how to use them, and how to leverage them to more carefully evaluate potential investments.
1. Coface Country Risk Rating
The Coface Country Risk Rating is one of the most reliable tools for assessing a country’s credit risk, providing a detailed analysis of its economic, political, and financial conditions. Coface, a leading global credit insurance company, develops ratings based on a wide range of factors that include government solvency, macroeconomic dynamics, and political stability.
This rating is essential for international investors, as it provides a clear indication of the likelihood that a country will default or delay the payment of sovereign debt.
Coface classifies countries according to four levels of risk: very low, low, medium, and high, providing a clear indicator of the reliability of a market.
Why is it important? Knowing whether a country is considered low or medium risk can significantly influence investment strategies. A high rating may indicate a stable economy and manageable monetary policy, while a lower rating could reflect structural weaknesses, high inflation, or risks of political instability, all of which can jeopardize investment returns. Using the Coface Country Risk Rating allows investors to mitigate sovereign credit risks and protect their portfolios from exposure to vulnerable economies.
2. Economist Intelligence Unit (EIU)
Another source of information is the Economist Intelligence Unit (EIU). The EIU is a research division of The Economist and one of the best surveys they offer is the Country Risk Service.
These ratings cover 131 countries, with a focus on emerging and highly indebted markets (Country Risk Model).
The rating looks at similar factors to the ECR rating, such as economic and political risk, and provides a score on a 100-point scale; however, unlike the former, higher scores indicate a higher level of risk.
An advantage of the EIU ratings is that they are updated on a monthly basis, so trends can be spotted much earlier than other less frequently updated tools. In addition, the EIU offers investors more analysis and provides a country outlook with two-year forecasts for several key variables.
So if you want to know what a particular country is headed for the foreseeable future, this could prove to be a useful tool.
3. S&P Global Ratings
The S&P Global Sovereign Credit Rating assesses a country’s ability to meet its financial commitments, providing investors with a clear picture of the risk associated with investing in government bonds and other financial instruments tied to that country.
Rating agencies, such as Standard & Poor’s (S&P), issue a sovereign rating ranging from AAA (excellent) to D (in default), based on the country’s creditworthiness.
This tool is important because it reflects the financial health of a country’s government, taking into account variables such as debt-to-GDP ratio, fiscal and monetary management, and political stability. Investors use these ratings to make capital allocation decisions, as a positive sovereign rating is indicative of a relatively safe investment environment. A downgrade, on the other hand, can lead to capital flight and an increase in financing costs for the country in question.
Using the S&P Global Sovereign Credit Rating, investors can then estimate the probability of sovereign default and calculate an appropriate risk premium for investing in that country. A sudden deterioration in the rating can cause a devaluation of the sovereign debt, making investments in government bonds riskier and negatively affecting the local currency.
4. Doing Business Rankings, World Bank Group
The Doing Business Index (or Rankings) of the World Bank measures the ease of doing business in different countries, analyzing variables such as the ease of obtaining credit, investor protection, the efficiency of the bureaucracy, and the level of regulation of contracts. This tool does not limit itself to providing economic data but also evaluates the quality of institutions, a critical aspect for foreign investors.
Why is it important? The Doing Business Index is useful for assessing the operational risk associated with direct investments in a country. A high score means that a country has a favorable business environment, with light bureaucracy and clear regulation, while a low score may indicate difficulties in obtaining permits, high compliance costs, or difficulties in enforcing legal rights.
Investors looking to establish or acquire businesses in a country use the Doing Business Index to assess operating costs and risks, as well as to estimate growth potential and the ability to access credit. The ranking is an essential tool for deciding which countries are best to start commercial or industrial operations while minimizing the risks associated with local management.
5 OECD Country Risk Classification
Finally, it is impossible not to mention the OECD Country Risk Classification, a tool used to classify the sovereign credit risk of member and non-member countries of the Organisation for Economic Co-operation and Development (OECD).
This classification takes into account the risk of default on public and private debts towards foreign investors, ranking countries on a scale from 0 to 7, with 0 indicating the lowest risk and 7 the highest.
Therefore, the OECD Country Risk Classification is a key reference for investors who wish to assess a country’s ability to meet its external debt obligations. A higher rating indicates a greater risk of default and loss of capital for investors, while a lower rating suggests that the country is in a sound financial position.
This tool is widely used by export credit agencies and institutional investors to estimate appropriate interest rates and sovereign risk insurance premiums.
For investors who have limited time and resources but want to diversify their portfolio internationally, these tools can be a great help in creating a short list of countries that are advisable to invest in. Each method has its strengths and weaknesses, and it may be optimal to use a combination of all of these data sources to know exactly how risky a country is.
Original article published on Money.it Italy 2024-10-22 17:30:45. Original title: Come investire all’estero? 5 strumenti per calcolare il rischio
