Macro Risk
What is Macro Risk?
Macro risk is the risk that the political activity in a country will affect the operations of foreign companies that do business in that country.
How Does Macro Risk Work?
For example, let's say the government of the country of Cyprus is facing a fiscal crisis and decides to seize a portion of all the money in bank accounts held in the country. If American company Company XYZ does business in Cyprus and has a bank account there, some of its assets are therefore subject to the whims of the Cyprus government. In fact, any company doing business in Cyprus probably has a bank account there and thus faces this risk of seized assets. Accordingly, the crisis in Cyprus isn't contained to Cyprus -- it represents macro risk because it has ramifications for businesses around the world.
Why Does Macro Risk Matter?
Macro risk is a major factor for international businesses, and thus it influences stock returns and portfolio strategy in turn. Macro risk is also a major factor in currency valuation.
It is important to note that macro risk is not always within a foreign government's control. Situations such as war, natural disaster or crop-destroying weather also can create macro risk.
