In just three months, 2008 has served as a stark reminder that, yes, there is political risk to consider when you invest overseas.
In the past 90 days, for example, these significant geopolitical events have occurred:
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Kosovo declared independence from Serbia, launching a disapproving reaction from economic titans Russia and China.
- Tibetan protestors are giving China a black eye leading up to the 2008 Beijing Summer Olympics.
- The Colombian army crossed into Ecuador to assassinate a rebel FARC leader, drawing ire from Ecuador and its ally Venezuela.
- Fidel Castro stepped down as the leader of Cuba after 49 years in power.
- Israel and Palestine ... Well, the saga continues.
While none of these events appears to be leading to full-out war at the moment, investors would nonetheless be wise to reassess their political risk tolerance.
Let me count the ways
What's notable about the political conflicts in 2008 is that most of them have occurred in emerging markets, which have also been home to many big winners over the past five years, such as GigaMedia (Nasdaq: GIGM ) and NetEase.com (Nasdaq: NTES ) .
Conflicts that arise among emerging-market nations aren't just important to those who own shares in companies based there, such as Brazil's Petrobras (NYSE: PBR ) , China's Sohu.com (Nasdaq: SOHU ) , or Russia's Vimpel Communications (NYSE: VIP ) . Nor should they be monitored only by investors in multinational U.S. firms like Coca-Cola (NYSE: KO ) and Cisco (Nasdaq: CSCO ) .
In fact, every investor should keep tabs on political conflicts around the world -- no matter where they invest.
Why, you ask? For one, these regions are playing a large role in sustaining global demand for industrial products, consumer goods, and energy sectors. A hiccup in socioeconomic progress, retaliatory tariffs, or all-out military conflict in any of these countries could adversely affect the global economy.
Moreover, many of these countries possess a significant amount of natural resources, particularly oil. A disruption in the global flow of Texas Tea would undoubtedly drive oil prices well over the current $110 per barrel price.
I'm so ... scared!
Yes, there are tremendous gains to be made in emerging-market stocks, but a large exposure to this segment isn't suitable for everyone, particularly those who can't tolerate volatility.
In addition to political risk, emerging market investors also need to consider additional currency, economic, and general country risks before investing. After all, there's nothing quite like a country's nationalization project -- as happened with the Venezuelan oil industry in 2007 -- to drive fair-weather investors to seek safer harbors.
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