So-called 'political risk' is not something investors consider often when making a purchase in the share market.
Partly this is because Australia and the major international markets in the UK, Eurozone and USA are so stable.
If we're honest – and I include myself here – it's also partly due to ignorance.
It's simply very difficult to grasp how an investment will be perceived in a foreign country or culture without understanding the political climate, keeping up to date on the news, and knowing the laws.
Political risks can include:
- Multi-national corporations becoming terrorist targets
- Certain medicines being illegal in various jurisdictions
- Company activities and products failing to appeal or offending consumers in that region
- Laws being changed, for instance to better protect consumers
- Governments supporting domestic industries (at the expense of foreign ones) in an anti-competitive manner
- Royalties being increased in order to retain more profits
- Investments being blocked because they simply don't fit with the prevalent beliefs and needs in the region
It's this last reason that has affected Crown Resorts Ltd (ASX: CWN) today, with Sri Lanka's newly elected President Sirisena fulfilling his election promises and blocking plans for a number of new casinos in the country (hotels and residential apartments may still go ahead).
Fearing that an increase in casino activity would lead to higher levels of prostitution and damage moral values in the region, all existing casino licenses are additionally under review.
Crown's casino might go ahead at a later date, in a special gambling zone of the island, but this has not yet been decided and may not come to pass.
Thankfully for shareholders the news will not cost the company significantly since the project has not yet commenced, but it is a reminder that overseas expansion is not as simple as watching valuable foreign currency earnings roll in.
For readers looking to invest more into overseas companies, the World Bank runs an 'ease of doing business' index on every country in the world which is well worth a look when considering a company with a strong overseas focus.
