What does geography have to do with risk management?
Take a look at how a different marketplace could affect your investments.
All companies are affected by fluctuations in their market place.
New and evolving, goods and services drive changes in an organisation’s direction, and subsequently affect their performance over time.
There’s a reason a firm that once sold CD-ROMs now profits from selling smartphones.
As landscapes shift, so companies must learn to adapt, but the wider economy has a direct effect on businesses too. These kind of influences are grouped under the term macro-economic factors.
Inflation, unemployment, politics, legislation, even the weather are just some of the categories that are grouped this way.
Another key factor is interest rates. If they go up, certain businesses will benefit, and others may suffer.
For example, construction firms building new houses may see their business adversely affected by a rise in rates, as potential new buyers may be discouraged by higher mortgage costs.
Conversely, financial institutions are more likely to profit, as existing homeowners’ find their mortgage repayments start to rise.
Macro-economic factors also affect investors. UK-based investors who have the majority of their wealth here at home, will find a variety of these factors impacting upon their investments.
Brexit offers a timely example, as the complex set of uncertainties faced by UK companies at this time has a knock on effect for investors.
Diversification helps to manage these risks. Investing in markets beyond our own, exposes investors to different macroeconomic factors – reducing risk through greater geographic diversity.
Generally, markets are split in two ways: developed economies – such as the UK, Europe, the us or Australia and emerging economies, like those in Asia, Africa or South America.
Developed markets are broadly a less risky investment, as the macroeconomic factors tend to be more stable because corporate checks and balances are greater and companies are more keenly regulated.
Spreading your risk across different markets is just one of the ways to make the most of your investments.
