Political risk associated with countries is often considered the domain of businesses and institutional investors. But as the recent Thai roller coaster demonstrates, individual investors would also do well not just to spread their investments across asset classes but across geographies as well, and hence keep tabs not only on the markets but also on the environment in which the markets operate.

Most professional asset managers do just that. Franklin Templeton's emerging markets equity strategy, for example, is to invest a portfolio in 18 to 20 countries and some 100 individual names. The portfolio managers do not invest more than 20 per cent of assets in any one country or sector, eliminating the chance of geographical and sectoral overdependence.

Taking a leaf out of the book of professional portfolio managers can be a problem, though, in cases of political risk. Unlike other investment parameters, risk is a qualitative factor, so different portfolio managers have different methods of quantifying it. As there is no standardised method of factoring or managing such risks, the same risk element is often variously interpreted.

According to Harpreet Sajjan, an associate at wealth management firm Platinum Financial Services, his company assigns countries a qualitative risk rating and those that score high are simply avoided.

'For example, despite being based in Thailand, we don't invest there. Vietnam is another region where we don't invest, and there are more. If clients insist on exposure to such regions, we make them fully aware that we don't recommend it. If they still want it, it's their call.'

And then there is the other extreme of asset managers who factor in political risks but are much more concerned with individual companies rather than macro-level, off-balance-sheet risks because the latter cannot be accurately predicted. Aberdeen Asset Management, says its chief Asia strategist Peter Elston, does not consider political risk 'formally'.

'On the fixed-income side, we are more top down, but still do not consider political risk in a formal way. On the equities side, we are pure bottom-up investors, assessing companies on their own merit rather than where they operate.

'In fact, sometimes we find the best companies in countries where political risk is higher because companies forced to deal with an uncertain political environment have to be well managed or else struggle. Thailand and India are good examples. Political risk is arguably quite high in both but we find some of the region's best managed companies there.'

Let alone factoring it, even locating political risk is subjective because of its qualitative nature. Some of this year's top political risks drawn up by risk consultancies can be as varied as China-US relations and a resultant spike in protectionism hurting companies, to the coming elections in Brazil impacting the neo-liberal economic climate there.

For Steve Vickers, president and CEO of FTI-International Risk, Russia is the country fraught with the greatest political risk. Risk intelligence provider Maplecroft also puts Russia's short-term risks as 'extreme'.

This illustrates the risk-return dilemma investors face, as Russian stocks rose 121 per cent last year and are many fund managers' favourites this year as well.

In Asia, Vickers sees India-Pakistan tension as the biggest threat to regional security and investment returns. India has seen a surge in investor interest in the past couple of years, with its benchmark stock index gaining about 80 per cent last year.

'If the government in Pakistan falls as a result of domestic troubles and the military reasserts itself, it's bad news for India. Its government has been restrained so far but another massive terror strike on its soil may provoke it to retaliate, putting global investors at risk,' says Vickers.

Eurasia Group also puts this as one of the top 10 global political risks while Political and Economic Risk Consultancy lists India as the riskiest in its 2010 outlook because of external security risks and internal terror threats and insurrections.

Australia, on the other hand, gets the highest grades in its report, followed by Singapore, Hong Kong and Japan, making them the safest places to invest.

Another risk consultancy, Control Risks, identifies the 'deteriorating health' of North Korean leader Kim Jong-il and Thailand's King Bhumibol Adulyadej as 'considerable sources of political uncertainty'.

In the case of North Korea, risk analysts, including Vickers, say an internal power struggle can manifest itself in external belligerence, such as missile firing, spilling out beyond its borders to draw in Japan and South Korea and affecting investors everywhere.

Some portfolio managers go beyond the obvious in looking for political time bombs. Bank Sarasin, for example, takes economic performance as an indicator because it believes bad economics is more likely to generate bad politics. The Swiss private bank even keeps an eye on water shortages in different parts of the world for their capacity to trigger conflict.

In its political risk map, Aon Risk Services has also introduced indices measuring food and water insecurity.

Now, once the risk triggers are mapped out, how do investors factor the information into their portfolio?

According to Sankarshan Basu, a founder member of the Asia-Pacific Association of Derivatives and an associate professor at the Indian Institute of Management, such risks can be ignored if liquidity is not a factor for investors and they are content with an increase in net worth on a notional basis. If not, the portfolio must be diversified not just in terms of assets but also geographies.

'In this recession, software companies focused on only one country, say the US, suffered the most. These were primarily small players. On the other hand, take Infosys. No geography accounts for more than 10 to 15 per cent of its revenues, and hence the impact was less acute. The same would be the case with geographically-concentrated investors,' says Basu.

Sarasin's chief investment officer, Burkhard Varnholt, takes this line a step forward, saying investors can follow the bank's lead in putting their money in companies that are geographically diverse to insulate themselves from political- or other macro risks in a particular country.

'This year we have shifted all our emerging-market exposure to the Nifty 50 group of blue-chip companies that are strong and well spread out such as McDonald's, Coca-Cola, Nestle and Unilever,' he says. To safeguard against protectionism, his advice is to focus on companies that are less vulnerable to policy swings. Those that provide critically important resources such as mining firms are a good fit for investors worried about this particular risk, he says.

Varnholt also says investors can emulate Sarasin's strategy of keeping 10 per cent of its asset holdings in gold as an insurance policy. 'Gold is a good proxy for a global worry index. We always hope we don't make a lot of money on our gold position as gold makes money when all other things are not going the way we hope.'

When everything else is not going right, it can actually be a good time to buy if one treats political risk as an opportunity rather than a contingency, following Baron Rothschild's maxim of buying when there is blood in the streets.

James Bolus, CEO of financial planner International Financial Services, says those with high risk appetites and convinced of the fundamentals of the investment targets could actually use a crisis such as the one in Thailand to their advantage.

That is what Catherine Cheung, head of investment strategy and research at Citibank Global Consumer Group in Hong Kong, is asking investors to do. Throughout the current crisis, she has been advising investors to maintain a target of 915 for the SET and says investors can treat any correction as a 'buy' opportunity. The SET closed at 763.5 on Friday.

Like Aberdeen's Elston, Cheung's optimism stems from fundamentals. Thai stocks, which have risen over 75 per cent in the past year, have the third-lowest valuation in Asia, after Pakistan and South Korea. Cheung also sees a wave of earning upgrades based on strong economic activity.

The Thai economy's fairly strong performance and its companies' solid balance sheets are the reasons why investors ignored the storm clouds initially. But as the crisis shows, a good investment decision can be as much about what is on the balance sheet as what is off it. It is about finding that balance.