A balanced portfolio might do well to include some assets in high-risk countries as chances are the returns might well far surpass those in traditional safe haven countries.
Text & Photography by Jan Yong
In Issue 13, we wrote about 3 of the last emerging countries in Asia – Sri Lanka, Myanmar and Mongolia – that are most promising in the next few years.
The idea is that when a country is going through a transition, for example, political change as in Myanmar, there is always a risk that the old regime may stage a comeback causing unrest or that reforms might take too long. Hence, the higher risk premium assigned to the country. But higher risk also means higher rewards when the risk is no longer present. Thus, looking at a country’s risk premium presents another way of assessing whether it’s the right timing to enter a country.
There is much research work out there trying to measure the risk profile of a country in terms of investment. One of them is University of Navarra in Spain, which surveyed respondents comprising analysts, company directors, academics and economists for their views on the ‘risk premium’ of dozens of countries.
‘Risk premium’ essentially means the additional return above the risk-free rate that an investor can expect. In other words, the riskier a country is, the higher the return an investor can expect. The researchers took into account the stability of a country (politics, currency, stock market), inflation, sovereign bond yields, legal environment and a range of other macroeconomic and political factors.
Looking at the profile, at 15.3%, Venezuela topped the list with the highest risk premium – meaning if you enter the country now with its myriad problems – hyperinflation, shortages of basic necessities and rampant crime (nicknamed the ‘country with the most murders in the world’), you might come out reaping the greatest reward should oil prices rebound to its previous record highs of over USD100 a barrel. Venezuela used to have it good being home to the largest oil reserves in the world. However, the dramatic fall in oil price since last year has plunged the country into chaos.
Then again, in the real world, to invest in Venezuela now might not be the best idea because there is some consensus that oil price has reached the ‘new normal’ of only USD50 a barrel.
At the other end of the scale, Liechtenstein with a risk premium of 4,8%, the only country surveyed that chalked below 5%, barely causes any ripples of excitement, presumably due to its small size and residence requirements for foreign purchasers. ‘SAFE HAVEN’ TOO SAFE?
Predictably, countries that recorded risk premiums of below 6.0% are those that are already much favoured as property safe havens such as the UK, the US, Australia, New Zealand, Japan and Singapore.
Choosing the right country to invest in is part science, part art plus a bit of luck. The risk premium table above is but one of the tools to help you decide which country to invest in and when to enter it.
Worth noting is Malaysia at 6.5% and Vietnam at 9.9% while China recorded 8.3%. Simply put, it means the risk of investing in Malaysia is much less than Vietnam or China – but the rewards of investing in the latter two may outweigh the returns from Malaysia.
The takeaway? Just like in stocks, investing in property in high risk countries might be a good strategy for a balanced portfolio. The returns could far surpass what you get in traditional safe haven destinations.