Political Risk

From Financial Literacy Wiki

Political risk are risks associated with the political situation, social instability and diplomatic relations.

Political instability may occur in emerging markets and developed markets that are due for elections. Any adverse result in elections or sudden changes in the government may cost investors' confidence, resulting in an outflow of funds from the secondary market.

For countries with high social instability and adverse diplomatic relations, it may adversely affect the economic conditions of relevant countries resulting in a drop in value of investments in these countries.

In Unit Trusts

Country-Specific Unit Trusts especially those that invest in emerging markets are more susceptible to this risk whereas Sector-Specific Unit Trusts are able to diversify, as they invest in many countries.