Hedging obstacles
But Landsbref is encountering a major obstacle here: most Icelandic investors are hesitant to take on foreign currency risk at the moment.
“Because of the influx of tourists into the country over the last 2-3 years, the Icelandic krona (ISK) has appreciated quite drastically, and everybody expects the currency to appreciate further. So it would help a lot [to entice clients] if funds were offering ISK-hedged share classes,” says Brynjolfsson.
But this isn’t happening, because a vital part of the currency controls is still in place. “It’s still not allowed to take a long or a short position in ISK without committing a significant cash outlay. The basic carry trade is not yet, and will presumably never be possible. So foreign currency hedging is very difficult to do, and we are not offering this option to our clients.”
If Icelandic (retail) investors believe their currency will appreciate by 5-10% over the next 12 months, investing in foreign equity markets looks less than compelling indeed. But investors, especially those in Iceland, would do well to be aware of base currency risk too.
In 2008, the Icelandic currency collapsed, wiping out ISK savings. And there is nothing to suggest the ISK will remain strong forever. “I agree,” says Brynjolfsson. “And thats why at least some of our clients have begun investing abroad.”
