What Is Macro Risk?
Macro risk is political, social, or economic turmoil that harms businesses operating within a country. Common examples of macro risk include changes in monetary policy, shifts in the regulatory or tax regime, and civil unrest.
Understanding Macro Risk
Macro risk in any country or region can harm any company that has operations or does business there.
Consider, for example, a country that elects a government opposed to foreign influence and interference. The government could expropriate foreign operations, regardless of industry. Or, it might just place a high tariff on imports, making it impossible to do business there.
Many organizations and academics issue reports that assess a country's or region's degree of macro risk.
Some companies purchase political risk insurance to mitigate potential losses.
Global Risk 2024
S&P Global's Outlook for 2024 finds that some nations have responded to inflationary pressures more effectively than others. The U.S. and U.K. economies appear to be in the healthiest position economically, while European Union nations have flat-lined.
Macro Risk and the Impact on the Market
Macro risk is both a short- and long-term concern forfinancial planners, securities traders,and investors. Some of the macroeconomic factorsthat can influencemacro risk include unemployment rates,interest rates,exchange rates,andcommodity prices.
Some macro risks will have a greater impact on a particular sector than on others. Changes in environmental regulations, for example, tend to impact the mining and energy industries more than other industries. However, the repercussions for these industries can then ripple through an economy if mining and energy are significant sources of investment and jobs.
Changes in unemployment rates, interest rates, exchange rates, and commodity prices are all macroeconomic factors that can increase risk and disrupt business.
Macro riskis an important factor forstock tradersandinstitutions to consider in their financial and risk models. Most macro risks are addressed in valuation models like the arbitrage pricing theory(APT) and themodern portfolio theory (MPT) models.
Valuationmodels andclosely relatedfundamental analysismodels also consider macro risk as a factor. Understanding howmacro risk influences the intrinsic value of an investment is important because when the factors change values, errors can be introduced in the corresponding intrinsic valueforecasts.
Macro Risk and International Investment Flows
Investors also look at macro risk to gauge political stability andgrowth opportunities in other countries. There are several annual international rankingsof countries that provide insight into their relative political and social stability and how that correlates with potential economic growth.
Investors can take action either by investing directly in a country or byinvesting inregional mutual funds or exchange-traded funds (ETFs). With some emerging markets, the growth story can be compelling even if the macro risks are significant. If an investor is diversified over enough markets, the macro risks of any particular investment are somewhat cushioned from volatility.
How Do I Determine a Country's Macro Risk Level?
Several reports track the current risk of doing business in a nation.
Dun & Bradstreet, for example, issues an annual report that tracks the risks of doing business in 130 countries. Some of those risks, such as inflation and monetary tightening, affect nearly all countries with varying degrees of severity. Others, such as the invasion of Russia by Ukraine, are country-specific.
The company's 2023 report, for example, concluded that macro risk had declined in Bahrain, Cyprus, and Hong Kong. But it warned of growing macro risk in Sierra Leone.
What Is Micro Risk vs. Macro Risk?
Micro risk is company-specific or industry-specific. Macro risk affects many or all businesses to varying degrees.
For example, the potential for inflation and higher interest rates are macro risks that affect many businesses in many nations. Natural disasters or political upheavals are risks that are limited to one country and normally only some of the companies that do business there.
Do All Emerging Markets Have Macro Risks?
Emerging markets may be relatively fragile. The opportunities they offer may outweigh the risks involved to investors. Consider, for example, the enthusiasm some years ago for the BRICs emerging nations of Brazil, Russia, India, China, and South Africa. It still exists as an organization for economic development, but Russia might not be included if the list were created today.
The Bottom Line
Macro risk is one factor to consider in making any investment. It is of particular interest in considering an investment in a foreign nation or region. The list of potential risks is different in substance and likelihood for every nation.
