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Page: Country Risk Ranking System - How I Assess My Stock's Country Risk

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Country Risk Ranking System - How I Assess My Stock's Country Risk

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As explained in the article: Country Risk Assessment - 14 Free Resources for Conducting Your Stock's Country Risk Analysis, I value the content presented in the country risk reports from the Coface Group, A.M. Best and the Fraser Institute the most.

I have combined these country risk assessments to create UndervaluedEquity.com's Country Risk Ranking System (CRRS), which is expressed in a five-level ranking system. In ascending order of risk, these are: CRRS-1, CRRS-2, CRRS-3, CRRS-4, and CRRS-5. All five-levels are marked by UndervaluedEquity.com's CRRS Color Code, ranging from bright green for countries with the least amount of country risk until bright red for countries with the highest level of country risk. At the bottom of this page you will find a clarification regarding UndervaluedEquity.com's Country Risk Ranking System.

Country Risk Analysis from The Coface Group

The Coface Group uses a seven-level ranking system. In ascending order of risk, these are: A1, A2, A3, A4, B, C and D. In order to use the Coface Group's ranking system in UndervaluedEquity.com's Country Risk Ranking System I have linked the Coface Group's ranking system to UndervaluedEquity.com's CRRS Color Code, as shown in the table below:

The Coface Group's Seven-Level Ranking System

 
Ascending Order of Risk  CRRS Color Code 
A1  
A2  
A3  
A4  
B  
C  
D  

Country Risk Analysis from A.M. Best

A.M. Best uses a five-level ranking system. In ascending order of risk, these are: CRT-1, CRT-2, CRT-3, CRT-4 and CRT-5. In order to use A.M. Best's ranking system in UndervaluedEquity.com's Country Risk Ranking System I have linked A.M. Best's ranking system to UndervaluedEquity.com's CRRS Color Code as well, as shown in the table below:

A.M. Best's Five-Level Ranking System

 
Ascending Order of Risk  CRRS Color Code 
CRT-1  
CRT-2  
CRT-3  
CRT-4  
CRT-5  

Country Risk Analysis from The Fraser Institute

The Fraser Institute's PPI index is based on ranks and is calculated so that the maximum scores are 100. Each jurisdiction is ranked in each policy area based on the percentage of respondents who judge that the policy factor in question “encourages investment.” The jurisdiction that receives the highest percentage of “encourages investment” in any policy area is ranked first in that policy area; the jurisdiction that receives the lowest percentage of this response is ranked last. The ranking of each jurisdiction across all policy areas is averaged and normalized to 100. A jurisdiction that ranks first in every category would have a score of 100; one that scored last in every category would have a score of 0. As an example, a rank of 15/90 means that this specific jurisdiction ranks 15th out of the 90 jurisdictions included in the annual survey.

In order to use the PPI index in UndervaluedEquity.com's Country Risk Ranking System I have broken down the jurisdictions into five rank ranges and linked them to UndervaluedEquity.com's CRRS Color Code too, as shown in the table below:

Fraser Institute's Annual Mining Survey1

 
Edition  2012/ 2013   
Amount of Jurisdictions  96   
Jurisdictions Breakdown  Fraser's Rank Range  CRRS Color Code 
1% - 20% 1 - 19  
21% - 40% 20 - 38  
41% - 60% 39 - 58  
61% - 80% 59 - 77  
81% - 100% 78 - 96  

 

 

UndervaluedEquity.com's Country Risk Ranking System

Summarized, UndervaluedEquity.com's CRRS Color Code is categorized as follows:

Country Risk Resources  CRRS Color Code 
The Coface Group's Ranking A1 A2 A3 A4 B C D
A.M. Best's Ranking CRT-1 CRT-2 CRT-3 CRT-4 CRT-5
The Fraser Institute's Rank Range 2012/ 2013 1-19 20-38 39-58 59-77 78-96
UndervaluedEquity.com's Country Risk Tiers CRRS-1 CRRS-2 CRRS-3 CRRS-4 CRRS-5

In situations where the Coface Group, A.M. Best and the Fraser Institute do not classify a specific jurisdiction into the same CRRS Color Code, I always calculate a weighted average to determine in which CRRS Color Code this jurisdiction falls. In this case, CRRS-1 equals 5 points, CRRS-2 equals 4 points, CRRS-3 equals 3 points, CRRS-4 equals 2 point and CRRS-5 equals 1 point.

A definition of the different country risk tiers, together with their associated weighted averages, is provided in the table below:

UndervaluedEquity.com's Country Risk Tiers

 
Country Risk Tier  Weighted Average  Definition 
CRRS-1  4.50 - 5.00 These jurisdictions have the highest ranking possible and are therefore the jurisdictions with the least amount of country risk. Logically, I prefer to invest in stocks who operate in jurisdictions with a CRRS-1 rank.
CRRS-2  4.00 - 4.49 These jurisdictions have the second highest ranking possible. I feel myself quite comfortable in investing in stocks who operate in jurisdictions with a CRRS-2 rank.
CRRS-3  3.00 - 3.99 These jurisdictions have a neutral ranking. Whether or not I invest in companies who operate in jurisdictions with a CRRS-3 rank fully depends on the current developments in that specific jurisdiction. If I assume that the current developments have a positive effect on the ranking of this jurisdiction as a whole, and the other parts of my stock investment analysis support a buy rating, I still feel myself quite comfortable in investing in stocks who operate in jurisdictions with a CRRS-3 rank.
CRRS-4  2.00 - 2.99 These jurisdictions have the second lowest ranking possible. Unless the other parts of my stock investment analysis support a real strong buy rating, I will not invest in stocks who operate in jurisdictions with a CRRS-4 rank.
CRRS-5  1.00 - 1.99 These jurisdictions have the lowest ranking possible and are therefore the jurisdictions with the highest amount of country risk. I do not invest in stocks who operate exclusively in jurisdictions with a CRRS-5 rank.

 

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Note: It is possible that the country risk report of a specific country isn't available via the Coface Group, A.M. Best and or the Fraser Institute. In such cases I try to replace these sources for one of the other sources mentioned in the article: Country Risk Assessment - 14 Free Resources for Conducting Your Stock's Country Risk Analysis. When I can't find another country risk report via the other sources either, I browse the internet in order to form an opinion about it's country risk. In general, when the country risk report is missing at my preferred content suppliers, I am always very sceptical to invest in that country.

Note: When I am assessing the country risk of a company who has multiple assets and or operations in different countries, I always try to calculate an average country risk ranking for the company as a whole. In such an assessment, I first determine which assets are the most important to that company, so that I can weigh the country risk on these assets heavier in the overall ranking of that company.

 

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1 I gathered this data from the Fraser Institute's Annual Survey of Mining Companies for the year 2012/ 2013. When they update this survey for the period 2013/ 2014 you should check the amount of jurisdictions included, and adjust Fraser's Ranking Range accordingly. Similarly, if you would like to use UndervaluedEquity.com's Country Risk Ranking System to assess the country risk for oil and gas companies, you should replace the data from the annual mining survey for the data found in the annual energy survey, as explained on the page: Country Risk Assessment - 14 Free Resources for Conducting Your Stock's Country Risk Analysis


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