The old belief that country risk could be diversified away is becoming increasingly untenable, the NYU Stern finance professor said in his new blog post. Companies are deriving more revenue from overseas markets while shifting production across borders, exposing both sides of their business models to risks originating outside their home countries.
Global equity markets have also become more correlated, particularly during crises, precisely when diversification is supposed to offer the greatest protection.
“There is no place to hide from country risk,” Damodaran said, arguing that neither businesses nor investors can afford to dismiss it.
The implications reach well beyond companies incorporated in countries traditionally labelled as risky. Outside regulated utilities such as power and water, it is now rare to find a business whose revenues and costs are entirely domestic, he said.
The exposure tends to increase as companies become larger. Technology companies, for instance, often generate more than half their revenue outside their domestic markets, making their country-risk profile substantially different from what their place of incorporation may suggest.
That means a US-listed technology company with extensive overseas sales may carry exposure to multiple countries, while an Indian company earning a large share of its revenue in developed markets may not warrant a risk assessment based solely on India.Damodaran’s analysis of companies in the S&P 500, FTSE 100, Nikkei 225 and Sensex showed that constituents of all four indices derive a significant portion of their revenue from outside their domestic markets.
US Downgrade Changes The Starting Point
The shift is most clearly visible in Damodaran’s treatment of the US itself.
Until 2025, he used the implied equity risk premium on the S&P 500 as the mature-market premium, based on the premise that the US, with its Aaa rating from Moody’s, represented the benchmark mature market.
The downgrade of the US to Aa1 has forced him to change that approach. The world’s largest equity market can no longer be treated as carrying no sovereign default risk.
With the S&P 500 at 7,499.36 on July 1, Damodaran estimated the implied US equity risk premium at 4.42%. He then deducted a 0.22% default spread associated with the Aa1 rating to arrive at a mature-market equity risk premium of 4.20%.
The adjustment may appear small, but it marks a significant conceptual break: even the US now carries a measurable country-risk component in Damodaran’s valuation framework.
For other countries, he begins with their sovereign ratings, converts those ratings into default spreads and then scales the result to reflect the greater risk of equities relative to government bonds. The equity-to-bond risk multiplier used in July was 1.55.
For about two dozen countries without sovereign ratings, Damodaran uses political-risk scores and maps them against rated countries with similar risk characteristics. His framework produces equity and country-risk premiums for roughly 180 countries.
India Story Must Underpin Indian Valuations
For investors analysing Indian companies, Damodaran’s message is that an India view cannot be separated from the valuation.
An investor cannot value an Indian or Brazilian company without an accompanying assessment of how the respective country’s risks may evolve, he said. Those risks influence the company’s narrative, expected cash flows and the return investors should demand.
But the Indian risk premium should not automatically be applied to every rupee earned by an Indian-incorporated company. Country-risk exposure comes less from where a company is registered and more from where it operates.
Damodaran suggested using overseas revenue exposure for consumer-product and service companies, production exposure for natural-resource businesses and a combination of revenue and production for manufacturers.
The same principle applies to investment decisions by multinational companies. A Siemens appliance project in India should incorporate both the risk of the appliance business and the relevant Indian country risk.
However, if the Indian factory produces goods for sale in Japan, the appropriate risk adjustment depends on where the principal uncertainty originates. Disruption to production would point toward Indian country risk, while volatile Japanese demand would make Japan more relevant. If both matter, Damodaran favours a weighted combination.
What Makes A Country Risky?
Damodaran traces differences in country risk primarily to four factors: political structure, corruption, violence and the ability of the legal system to protect property rights and enforce contracts.
Corruption acts as a hidden tax on companies and can distort business outcomes. Violence imposes direct costs on businesses, while slow or unpredictable legal systems increase both operating expenses and uncertainty.
Political structure presents a more complicated trade-off. Democratic systems can generate continuous uncertainty through elections and regulatory changes. Authoritarian governments may provide greater policy continuity, but any eventual change is more likely to be abrupt and disruptive.
The global tilt toward authoritarianism has increased over the past decade, with only 7.3% of the world’s population living in democracies at the end of 2025, according to the data cited by Damodaran.
He has also added climate exposure as a fifth dimension of country risk. However, climate risk has so far remained a weaker differentiator because no region is entirely insulated from it and its aggregate impact on corporate earnings is not yet large enough to dominate country-risk assessments.
Sovereign ratings remain the most widely available measure of default risk, and Damodaran said the major agencies generally agree in their assessments. Their principal weakness is that they can be slow to respond when circumstances change.
Sovereign credit-default swap spreads provide a market-driven alternative, but were available for only 84 countries as of July 1, leaving large parts of Africa and many frontier markets uncovered.
Composite political-risk scores carry their own problems. Different providers use different variables, weightings and even scoring directions, occasionally producing results that are difficult to reconcile. One measure cited by Damodaran ranked the US as riskier than Ghana.
Currencies, meanwhile, should not command a separate risk premium merely because they are volatile, according to Damodaran. They are measurement mechanisms affected by many of the same political and economic forces that drive country risk, rather than independent sources of that risk.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)