We might have expected 2022 to be a less challenging year than the last two. But we were in for a rude shock. The Russia-Ukraine war led to a stock market correction. And soon, the FTSE 100 index was back to the level of December 2021, when the Omicron-driven wobble happened. Many of my investment portfolio stocks are in the red now.
The one that stands out to me is the Russian miner and steel manufacturer Evraz. Not only is it in the red in my portfolio, trading in it has been halted recently. This only makes matters worse.Â
Consider country risk
And this brings me to the investing lesson I have re-learned in 2022. That is, to always keep country risk in mind when buying stocks. This risk is associated with the political, economic, and business environment in which the company operates.Â
I know it can look a bit confusing on the face of it, because after all, these stocks are listed on the London Stock Exchange. That is true, but so is the fact that a company can have multiple public listings in stock exchanges in different parts of the world. For example, AstraZeneca is listed both in the US and in the UK. As are the oil biggies BP and Shell.
The example of Evraz
But all companies have headquarters in a single country, or two at the very maximum. This is even if they have operations and markets in other parts of the world. Like in the case of Evraz, which has strong ties to Russia.Â
It was founded in Moscow. And more than 50% of its revenues are from mines in the country. Even before the war, taxes on mining products were already on the rise, which threatened to impact its profits. And now of course it faces higher interest charges on any new domestic debt. It also faces blocks on selling commodities in the international markets. Trading in the stock has now halted in London too.
It is possible that Evraz had the highest dividend yield among all FTSE 100 companies till recently to compensate for higher country risk. It was also helped by the bull run in industrial metal prices seen in the recent past, which resulted in bumper profits for miners. But Evraz was far more rewarding even then than miners like Anglo American or Switzerland-based Glencore.
Applying the investing lesson
It is logical, though. Typically, mature economies and stable democracies have lower country risks than others. The downside to such stocks is that growth rates are not always as high as those in some emerging markets, like Russia.
So it is really about my priorities as an investor that should drive my investing decisions. I am not averse to risk, but it is a nice reminder to always be aware of it, as in this case.Â