They found an enthusiastic audience of local fund selectors, keen to join the European Union and to step up their allocation to international equities.
Dreaming on
Both of these aspirations are far from being attained for at least the foreseeable future. The Icelandic government abandoned EU membership talks last year, following an election victory of Eurosceptic parties. The same government doesn’t show any sign of removing capital controls either. These were introduced in the aftermath of the collapse of Iceland’s highly leveraged banking system in 2008. As a consequence, Icelandic investors cannot increase their investments in foreign assets up until today.
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Fund selectors attending Expert Investor Iceland voiced their frustration about not being able to invest more in foreign stocks, with 93% of delegates responding favourably to the question whether they would increase their allocation to international equities if the capital controls were lifted overnight. Right now, they only hold 25% of their investments abroad.
Splendid isolation?
But according to some of the panellists, this forced insularity of the Icelanders could soon prove to be a blessing in disguise.
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“We have never before had a spread of 200 bps between equity dividend yield and sovereign bonds. The huge tail event I see looming therefore is this rectifying, prompting a destruction of the global bond market. The instability following from this will be so large that it will make us all suffer,” said Wahid Chammas, portfolio manager for Janus Capital Group’s Europe Fund.
“The low bond yields have a lot of unwanted consequences,” Threadneedle’s European Equity portfolio manager Francis Ellison added. “People try the funny stuff on the end like contingent capital bonds or coco’s, but that’s hideously dangerous. This kind of bonds will get massively buried when yields start going up.”
