Wherever there is investment, there is a risk. However, the range of risk can vary significantly. Risky investments can be very attractive because they usually offer the prospect of higher returns. It so happens that you can find some of the most attractive, and riskiest, investments in emerging markets. If you choose to dabble in these markets, investment risk insurance may be a beneficial option for you.
There is no guarantee that you will see the high returns expected from investments in emerging markets. In fact, you may lose your investment, as many things can go wrong. Weak institutions, ethnic or tribal divisions and highly skewed income and wealth distribution may affect the stability and predictability of the local political and economic climate. Investment risk insurance provides protection against losses that may arise because of these factors.
Risk From Violence
The risks from violence in emerging markets are remarkably real, ranging from insurrections and uprisings to guerrilla warfare and civil war and including terrorism and illegal acts to overthrow governments. In these circumstances, the governments of affected countries may not be capable of safeguarding foreign investments. Investment risk insurance can cover against damage of assets and the loss of income derived from violent acts.
Economic management may be incompetent or politically driven in emerging markets. Sometimes countries that are not economically stable get into trouble through no fault of their own. Governments may incur too much foreign currency debt, or the value of their primary commodity exports may suddenly fall in value, making that debt unsustainable. When faced with deteriorating financial situations, governments may resort to actions that make the local currency nonconvertible, put on capital controls or may drag out approval for the acquisition of hard currency indefinitely. This can seriously harm the financial value of your investments, a threat that investment risk insurance can cover.
Regimes may feel pressured or tempted to confiscate, in part or in whole, the facilities of investors. They may be responding to rabble-rousing or mainstream pressures or opposition parties. It might also be that they are new to power and genuinely feel that the country’s interests are better served by taking over foreign-owned companies. Resource nationalism is not an uncommon phenomenon, especially in an environment of generally rising commodity prices. The result may be outright nationalization or more subtle confiscation of income through unreasonably high taxes or forced renegotiation of contract terms. These are the kinds of risks against which investment risk insurance guards.
- international coins image by kshitize Agrawal from Fotolia.com