How to Invest in Currencies
With a high growth large-cap company, you "expect" its stock price to rise. Similarly, when a country is experiencing big economic growth, its currency (like China's yuan renminbi) is expected to go up. And generally, small-cap stocks rise more than large-caps because the new players have "more room" to grow. However, with "small-cap economies," the size of the country can be a fixed constraint that limits growth, increasing the risk of owning currencies like Vietnam's dong or Signapore's dollar.
Low risk. Higher risk offers higher returns, right? If a country poses high risk, investors in its economy would require a high return, which means they have to pay less for what they buy, and this translates to lower currency prices.
There are several groups that provide risk ratings for countries, usually from the perspective of credit insurers. Examples of such organizations are A. M. Best, the French export credit underwriter CoFace (that offers good, if short, descriptions of the risk issues, as well as numerical data hard to come by on bankruptcies in a given country) and the Belgian ONDD, with its wonderful graphical interface.
The following are the risk factors that most matter for an economy.
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