Canada is singled out as the least risky investment area in the August edition of the UBS/Gallup Index of Investor Optimism. It is followed closely by Japan and the United States.

The investor optimism index rose slightly in August, indicating that investor optimism continues its upward trajectory. It reached 61 in August, compared with 58 last month, 54 in June and 50 in May. Investor sentiment continues its modest rebound since a substantial drop-off in April when the Index dropped from 74 to 52.

U.S. investors were surveyed this month about the risks associated with investing in international securities and securities in specific geographical areas of the world. On a scale of one to 10, with 10 being the most risky, Canada ranked lowest at 4.7, followed closely by Japan and the U.S. at 4.9.

Despite the fluctuations in the U.S. market over the past eight years, the majority of investors have consistently rated their own portfolios as having moderate risk. The current figures show that 65% associate moderate risk with their portfolios, 10% associate high-risk, and 25% low-risk, little changed over the past eight years.

In the past seven to eight years there have been some major changes in investors’ perceptions of which countries provide the most risk to investment, UBS says. For Japan, this represents a major improvement from when UBS/Gallup last measured its associated risk in 1998, a time when Japan was in serious financial difficulty. In that survey, Japan scored a 6.7, with 39% of investors responding that it represented high risk. The current 4.9 average score for Japan includes just 10% of investors giving a high-risk score.

Areas perceived by American investors as the most risky include the Middle East, with an average score of 7.2; Africa, with a score of 6.8; and Russia, with a score of 6.6.

For Russia, the current rating represents a major improvement from seven years ago, when it won the unofficial title of riskiest area in the world with a score of 8.7. The poll, taken in September of 1998 clearly reflected the news that Russia had just defaulted on more than US$40 billion in domestic debt. At that time, 79% of investors gave Russia a high score of between 8-10, compared with just 41% who give Russia that high a score in the current poll. This past May, Russia announced its plans to repay early 38% of its domestic debt, which is likely a contributing factor in the recovering investor sentiment.

Other areas showing a major improvement in the past seven years include China, Eastern Europe and Asia (excluding China and Japan). In 1998, 47% of investors gave China a high-risk score, compared with only 23% today. 34% of investors gave Eastern Europe a high-risk score in 1998 compared with only 19% today. Finally, 48% of investors gave Asia a high-risk score in 1998 compared with 23% today.

Eastern Europe is now much closer to Western Europe in its risk ratings than it was seven years ago. Then Eastern Europe received an average rating of 6.6, with 34% of investors giving it a high-risk score. Today, its average score is 5.9 and only 19% of investors give it a high-risk score. Over the same seven-year period, Western Europe has shown little change, from an average score of 5.6 in 1998 to 5.4 today.

“As globalization makes the world a smaller and smaller place and integrates world economies, investors have become more receptive to investing in foreign markets and international securities,” said UBS associate strategist, Robin Miranda.

“Investments in foreign securities are now seen as an important element of a diverse portfolio and investors are increasingly looking for opportunities that lie in emerging markets.”

Following Russia’s debt crisis in 1998, investor confidence in international stocks and international global funds generally, without thinking about any specific area of the world, has steadily recovered. American investors are much more positive now than they were seven years ago. In September 1998, confidence sank. 42% of investors gave high-risk ratings to international global funds and 46% gave the same ratings to international stocks. Today, only 20% and 23% respectively give high-risk ratings to these two investment vehicles. The current ratings are similar to those measured in September 1997.

Also, last month China allowed its currency, the yuan, to be devalued rather than to continue to be tied to the US dollar as it had been for a decade. But the UBS/Gallup survey shows that investors are ambivalent about its possible effect on the U.S. economy. Twenty-nine per cent say the devaluation will have a positive effect, and almost an equal number, 31%, say a negative effect. Another 35% expect no effect one way or the other.

@page_break@These findings are part of the 89th Index of Investor Optimism, which was conducted August 1 to August 14. The sample includes 803 investors randomly selected from across the country. For this study, the American investor is defined as any person who is head of a household or a spouse in any household with total savings and investments of US$10,000 or more. The sampling error in the results is plus or minus four percentage points.