Nasdaq Iceland

Hlutabréfaviðskipti hafa verið mjög lífleg það sem af er ári. Dagleg viðskipti hafa að meðaltali verið um 2,2 milljarðar og nemur aukningin miðað við sama tímabil (til 24. ágúst) í fyrra 64%. Mest hafa viðskiptin verið í framhaldi af birtingu ársfjórðungsuppgjöra skráðra félaga sem og í byrjun árs þegar óróleiki einkenndi alþjóðlega hlutabréfamarkaði.

Þróunin á skuldabréfamarkaði hefur verið með allt öðrum hætti. Fjárhæð viðskipta hefur verið að meðaltali um 5,9 milljarðar á dag það sem af er ári, sem er 19% lækkun frá fyrra ári. Hafa viðskipti ekki verið jafn lítil (í óverðleiðréttum krónum) síðan árið 2005. Hugsanlega eru margir fjárfestar í biðstöðu á meðan beðið er eftir áhrifum slökunar hafta.  Lítil tíðindi hafa einnig verið af peningastefnunni þó að þar hafi orðið breyting á þegar Seðlabankinn lækkaði vexti óvænt þann 24. ágúst. Þá skiptir vafalaust líka máli að með aflandskrónuútboði, ásamt takmörkunum á eftirstandandi aflandskrónueignir í framhaldinu, og umtalsverðri bindiskyldu á erlent fjármagnsflæði inn á skuldabréfamarkað hefur að stórum hluta verið skrúfað fyrir viðskipti erlendra fjárfesta á markaðnum.  

Recently the Icelandic government and the Central Bank have taken decisive and long-awaited steps designed to facilitate the lifting of capital controls. On May 22 Parliament passed into law a bill laying the groundwork for a foreign currency auction for offshore krona owners. Two days later the Central Bank announced such an auction that subsequently took place on June 16. The Central Bank has noted that this was the last FX auction for offshore krona owners before the process of lifting the controls on residents begins.

On June 2 Parliament passed into law another bill which grants the Central Bank the authority to set rules stipulating a reserve requirement for certain new capital inflow, primarily into bonds, bills and bank deposits. This legislation is intended to give the Central Bank tools to reduce the risk of destabilizing short-term capital flows.

On June 4 the Central Bank followed up on the new legislation by setting Rules on Special Reserve Requirements for New Foreign Currency Inflows. According to the rules the reserve ratio on the new inflow in question is set at 40% with a holding period of one year and the interest rate on the reserves set at 0%. The reserve requirement rules provide a strong disincentive to short term investments in bonds, bills and bank deposits motivated by interest rate differentials as the 40% ratio takes a significant bite out of returns in the short run. However, as the investment horizon becomes longer the less is the impact on average yearly returns.

The two laws and the associated Central Bank action were met with a contrasting response in the bond market. Following the offshore krona legislation and the Central Bank’s auction announcement, 5 and 10-year (nominal) yields fell by about 20 basis points in active trading. The positive reaction by market participants may have been caused by expectations that the legislation would facilitate the normalization of capital flows. The modest size of the reaction might be due to the fact that the market had been anticipating an offshore krona auction around this time for a while, although its terms were not previously known. The Central Bank’s Governor said, for instance, in his speech at the Bank’s AGM on March 17 that the intention was to hold the auction in the first half of the year. In the auction that took place on June 16, the Central Bank accepted offers in the amount of ISK 72 billion out of ISK 178 billion offered for sale in the auction. For comparison the amount of offshore krona assets has been estimated at ISK 319 billion. Thus, less than one quarter of offshore krona assets were sold for foreign exchange in the auction. However, following the auction results, the Central Bank offered to purchase offshore krona assets not sold in the auction at the auction exchange rate (ISK 190 per EUR) provided such requests are received by 10am on June 27.  The reaction in the bond market to the auction results was limited with yields little affected.

The reserve requirement legislation was not a total surprise either. In fact, the Central Bank’s Governor alluded to it as one option in the aforementioned speech and noted that it could be argued that “policy instruments [that can be applied to curtail carry trade-related capital inflows] should be on the law books by the time the auction of offshore kronur takes place”. The impact of the legislation was, thus, also modest and to largely offset the yield decline in the wake of the enactment of the offshore krona legislation.

On the other hand, the Central Bank’s immediate use of the new policy instrument apparently took the market by surprise and yields shot up by further 40 basis points in heavy trading in the first two trading days after the rules were enacted, making the combined impact on yields of the reserve requirement legislation and the rules 50-55 basis points. The chart below shows 5- and 10-year yield developments (using the implicit yield on Nasdaq Iceland’s 5- and 10-year bond indexes) from May 20 (the last trading day before the offshore krona legislation) through June 22 (the first trading day after the offshore krona auction results were announced).

Interestingly the ISK exchange rate has not been much affected by recent events. It is possible that the Central Bank mostly neutralized any potential impact although this is not known (in May the Central Bank’s share of trading in the Icelandic FX interbank market was 59.3%).

It is worth emphasizing that equity investments, including those in shares listed on Nasdaq Iceland, are generally not subject to the special reserve requirements.

Yields on Nasdaq Iceland’s 5- and 10-year nominal bond indexes

On May 25 Iceland Seafood International was listed on the First North market in Iceland. Iceland Seafood is a worldwide sales, production and marketing group for a variety of frozen, fresh, salted and dried seafood. The company has a market capitalization of around USD 57 million, which places it in the top fifth of companies listed on the Nasdaq First North markets in the Nordics.

The listing of Iceland Seafood is the first equity listing in Iceland this year. It is also the first listing on First North Iceland since 2011. In addition, it is the first listing in Iceland for 13 years by a company in the important seafood industry. Somewhat surprisingly, given the significance of the seafood industry to the Icelandic economy, only one other seafood company is listed in Iceland, HB Grandi (market cap: USD 515 million) which is listed on Nasdaq Iceland‘s Main Market.  

The rebuilding of the Icelandic equity market in recent years has been characterized by listings of companies focused on the domestic market. Furthermore, they are usually leaders in their respective fields of service, be it retail, insurance, telecom, or real estate. This development is no coincidence. It can arguably be traced to two factors. First, appetite for risk was limited in the wake of the financial crisis and these domestic leaders are generally considered less risky than smaller growth companies. Secondly, and perhaps no less important as time has passed, the capital controls make it difficult for companies to raise money in Iceland for growth abroad. Hence, the natural outcome is a market with a relatively large population of „domestic giants“.

As these companies have large market shares, their growth opportunities are somewhat more constrained than those of smaller companies, not to mention those seeking growth abroad. Therefore, it is not surprising that listed companies on Nasdaq Iceland are returning cash to their shareholders to an increasing extent. In 2015 dividend payments by listed companies were six times greater than in 2013 or ISK 22.5 billion (about USD 186 million). Admittedly, this trend is in part due to the growth of the market but mostly it reflects sharply rising dividend yield. The average dividend yield, calculated as the total amount of dividends paid divided by the average of the total market capitalization at the beginning and the end of the year, rose more than 3 times from 0.8% in 2013 to 2.6% in 2015. What‘s more, companies have put added emphasis on returning cash to shareholders through other means. About one-third of listed companies have conducted share buyback programs and a couple of companies have performed capital reduction. Last year, such actions returned additionally over ISK 8 billion (USD 66 million) to shareholders, bringing the amount distributed to shareholders in one way or another to 3.5% of the average market capitalization.

Síðustu  misserin höfum við séð nokkuð oft tilkynningar frá skráðum fyrirtækjum um lækkun á hlutafé þeirra. En hvað þýðir þetta og hver er ástæðan? Þessar hlutafjárlækkanir sem við höfum séð undanfarið hafa átt sér stað með tvennum hætti:

(1)    Félög kaupa eigin bréf á markaðnum samkvæmt endurkaupaáætlun. Félögin tilkynna þá fyrirfram um fyrirætlan um að kaupa eigin bréf upp að ákveðnu magni á tilteknu tímabili samkvæmt heimild hluthafafundar. Í framhaldi af því að hafa safnað upp eigin hlutum með þessum hætti færa þau eigin hlutina niður og lækka þannig hlutafé. Sjóvá-Almennar tryggingar, Reitir fasteignafélag, Fjarskipti og Vátryggingafélag Íslands hafa t.d. lækkað hlutafé með þessum hætti nýverið.

(2)    Félög lækka hlutaféð hlutfallslega jafnt hjá öllum hluthöfum og greiða þeim út pening á móti. Síðari hlutafjárlækkun Fjarskipta nú í apríl var af þessum toga og sama má segja um tvær hlutafjárlækkanir N1 á síðasta ári.

As the Icelandic government prepares to abolish capital controls, it is not unexpected that people worry about the impact of such an action. Interestingly, however, the worries now seem to focus more on the prospects of excessive capital inflow following the capital account liberalizaton rather than too much outflow. The Central Bank is now looking into alternatives for dealing with potentially destabilizing capital inflows. This is quite a reversal from only a year or two ago, a reversal that can be traced largely to the strategy for lifting capital controls announced by the government in early June of last year and robust economic growth prospects.

A major piece of the government‘s strategy involved solving the problem concerning the failed banks‘ estates and the success of this phase of the strategy is perhaps best measured by the fact that Iceland‘s net foreign asset position has not been as favorable for decades. The next piece in the government‘s strategy are FX auctions for off-shore krona owners which are expected to be announced soon and to take place by the middle of the year. While the government is likely to follow a cautious approach to lifting the controls, as advocated by the International Monetary Fund, easing of restrictions on pension funds, corporations and households is expected to follow shortly.

Given the above, favorable economic forecasts and yields on Treasuries close to 6%, it is perhaps no surprise that since the government‘s announcement, inflows into Treasuries have risen substantially and the Icelandic krona strengthened by about 8% versus a trade-weighted currency basket despite the Central Bank‘s considerable FX purchases (amounting to 13% of Iceland‘s GDP in 2015). The graph below shows foreign ownership of Treasuries from the end of 2013 until the end of March 2016. Having lingered at between USD 1,300 – 1,400 million from year-end 2013 until mid-year 2015, the ownership by foreign investors took quite an upturn in the latter half of last year. This upturn has continued steadily in the first quarter of this year with foreign investors now holding close to USD 2,000 million of Icelandic Treasury bonds and bills.  

Nominal value of Icelandic Treasury bonds and bills held by foreign investors

Capital controls were enforced in Iceland under extreme economic distress in the wake of the financial collapse in October 2008. The right time to lift the controls has been under debate for some time, however with economic conditions dramatically improving over the past years and projections indicating further improvements, time has finally come to open the doors. The ground has been prepared – but how will the market be affected? First, let us look at the facts.

1)      Economic indicators look good. Just over 4% economic growth is forecast this year and around 3% in 2017 and 2018. The outlook is better than in most developed countries. Iceland‘s external position is more favorable than it has been for half a century. At the end of last  year, the net external position was negative by 14% of GDP, a better position than the average in the OECD countries and further improvements are on the horizon. The Central Bank‘s scheduled auction of offshore ISK is expected to have a positive impact as well. Furthermore, it is estimated that the cumulative surplus of foreign trade over the next three years will amount to 9% of GDP. Thus it is possible that the net external position will be positive within a few years.

2)      Resilient and flexible economy. Recent years‘ strong economic growth combined with a positive outlook point towards a flexible and adaptable future. The economy‘s adaptability has without doubt affected investment decisions of all investors looking towards Iceland, foreign or domestic. Unquestionably, external conditions have also been favorable. Falling commodity prices and low foreign inflation have so far kept inflation under control, despite rising domestic wages. Iceland has been trendy among tourists, not least because of the attention received in the wake of the Eyjafjallajökull volcanic activity. In recent years, annual export revenues of the tourism industry have increased surprisingly fast in a very short time. Robust tourism companies have been established and existing ones have been substantially strengthened. Looking at the labor market as a whole, the number of employees is now nearly 30 thousands greater than four years ago, a 17% increase.

3)      A growing confidence in the Icelandic economy. In recent years a growing confidence in the Icelandic economy has materialized through factors such as rising credit ratings. Furthermore, the credit ratings of the commercial banks have been raised, their debts‘ interest premia have fallen, and they have increased financing from abroad. There has been a considerable influx of foreign capital into the bond market since the government‘s announcement of lifting of capital controls as well as the creditors‘ declaration in June 2015. Thus, non-resident holdings of Treasury bonds and bills increased by 66 billion ISK from end of May, thereof 12 billion ISK during the first two months of this year.

Conditions for lifting the capital controls are thus favorable. But what will happen when they are removed?

1)      A turning point for growth companies. They will increasingly be able to finance themselves domestically for overseas growth. The limited possibilities of these companies to obtain capital from domestic investors for growth abroad under capital controls has hurt the companies themselves, investors and the economy in general. Without constraints on capital movement we can expect more growth companies to enter the stock market in the near future, including small innovative companies. As a consequence, the stock market should be able to support the economy more effectively by increasing productivity and creating jobs and thereby raise the standard of living.

2)      More diverse investment alternatives on the market. The public has increasingly found its way onto the market, particularly through mutual funds. It is likely that with a diverse spectrum of businesses on the market, individual investors will become more active.

3)      Increased participation of foreign investors in the stock market. Currently holdings by foreign investors in listed Icelandic companies are about 18% of the total market capitalization. The lifting of capital controls could facilitate access to capital for Icelandic businesses as well as support efficient price formation in the stock market.

4)      The pension funds will have more diverse investment alternatives. The pension funds will be able to increase their foreign investments, which is a healthy option for them to have in terms of more diverse investment opportunities and risk mitigation. However, given the economic outlook and local investment opportunities it is likely that the Icelandic market will still play a large role in their portfolios. There are concerns that free in- and outflow of capital could cause market disruptions, however these risks can be mitigated with sound economic policy and prudential rules for the financial system as well as more specific measures, such as the Central Bank‘s intervention and emergency brakes on capital inflow in the form of reserve requirements or taxes.

To summarize, the removal of capital controls will undoubtedly contribute to a more robust market, diversification by businesses and investors, a more active dialogue and efficient price formation on the market. It will open up a new channel for capitalization through the stock market, which in turn will be beneficial for growth companies and the economy at large.

What above all determines the economic success of a nation is the framework within which its businesses operate, the rules by which its economy is governed and how effectively those rules are enforced. Good corporate governance is one of the pillars of a sound market economy, which has brought nations greater prosperity than other forms of economic organization. If good corporate governance is compromised, the market economy is undermined. Good corporate governance is thus not only relevant to the stakeholders of the particular company in question. It is also an important public good.

Icelandic business leaders and the authorities were keenly aware of this fact in the wake of the collapse of the Icelandic banking system in 2008 which could to a large extent be traced to bad corporate governance. The Icelandic corporate governance guidelines were extensively revised and expanded in 2009 and have since been revised twice. The exemplary corporate governance certification is also an offspring of these efforts. Legislative changes were also made and banking and market surveillance reinforced.

The general public in Iceland has benefitted greatly from the recent strong economic growth. According to Central Bank estimates, the purchasing power of household‘s disposable income grew by 8% last year and is forecast to grow by another 9% this year. This growth has been primarily driven by private enterprises.  Salaries now account for 64.5% of GDP which is 3.5 percentage points above a historical 20 year average. In other words, the share of labor in national income is currently significantly greater, and the share of capital correspondingly lower, than it has been on average for the past 20 years. Income equality in Iceland is greater than it has been for years and only Norway ranks higher in this regard among European nations. In spite of these developments and the various measures, both by business and government, aimed to improve corporate governance, the general public’s confidence in business still has some way to go.

By and large, Icelandic businesses have acted responsibly and the benefits of the economic upswing have been relatively equitably distributed among the Icelandic population. Inevitably, there will be mishaps, but most businesses are determined to uphold high standards.

Yet, the idea persists that the private sector is largely indifferent to social responsibility. Part of the problem may be lack of informed discussion. Facts that cast light on the big picture don‘t attract much interest. Occasional mistakes and errors of judgement on the other hand, draw a lot of attention and greatly influence the public‘s perception of business in general.

With the Icelandic market on a steady recuperating course since 2008 and the government having announced that the relaxation of capital controls is on the horizon, overseas investors are starting to look towards the country again. Credit agencies have also taken a more favorable view which is understandable given the reduction in Treasury debt, forecasts of brisk economic growth and Iceland’s improving international investment position.  The bright outlook has also been reflected in the stock market which outperformed most other markets in 2015.

Foreign investment in government issues has increased sharply in the past year, especially after the government‘s announcement in early June last year on the strategy to lift capital controls. Foreign investors now hold over one quarter of treasury bonds and bills or about USD 1.8 billion in total. Inflows into equities have been more modest. Nonetheless, at the end of last year, foreign investors held about an 18% share of the Icelandic equity market. As the equity market grows and with liquidity on the rise (turnover was up almost 90% in January-February compared to the previous year), it would be no surprise if international investors were to turn their attention to a greater degree to the equity market, especially given macroeconomic developments.

Many things have changed since 2008. Investment habits have changed in the wake of the collapse – investors are calling for more information and greater responsibility in corporate governance. The comfort factor has changed, long term investors like to know more than just what the return on their investment could be expected to be, before they make decisions on where to put their money. One can say that the shareholder culture has changed from being rather passive to active as shareholders seek more engagement with the companies. This in turn gives the companies more opportunities to tell their story, which after all is their biggest selling point. How is the company to grow in a sustainable way; in a socially and environmentally responsible manner? Does it adhere to good corporate governance? Companies aiming for future growth must look towards how to be viable and successful in the new world of corporate responsibility. This trend has been growing internationally and now it is reaching Iceland. Some of Nasdaq Iceland‘s listed companies already have a social responsibility policy in place while others are starting to work on theirs.

Growth conditions for SMEs in Iceland are improving exponentially, not least for companies within the tourism industry. Analysts estimate a 30% annual increase in the number of visiting tourists to the country in the coming years and economic growth forecasts for the next two years are around 3.5-4%. So the timing for expansion is good.  This rapid growth has however provided some challenges for the sector and it is pivotal to come out on top. The need for new investments will be extensive and the tourism sector will likely look to financing on the securities market to catapult it to the next level. For the first time, an international conference on Iceland Tourism Investment will be held in Reykjavik next week, underscoring the need for discussing all options for those companies.

The Icelandic tourism industry is very dynamic and is highly reliant on the number of travelers coming in. New companies relying on tourism sprout up and a great majority of those are mini enterprises. As important they are for innovation, they do by their nature face an uncertain future. Many will not survive. So what are those companies’ best chances to sustain and thrive? What can owners do to secure their companies’ foundations for the future? It is costly to offer quality services and it requires good organization to bring on operational sustainability – and it can be very difficult to attract investors. This is where the stock market can come in.

Small and medium sized companies should be, and of course are of interest to investors, especially companies with good growth prospects and, consequently, should be good candidates for listing on the stock market. Alas, the stock market in Iceland has been considered inaccessible to small companies for many years now. But this is about to change. The conditions for listing are improving, with measures benefitting small companies either already implemented or being considered and this should give the Nasdaq First North market in Iceland a welcome boost. Nasdaq First North offers the best of both worlds, where companies can enjoy the benefits of listing with increased visibility and capitalization, but have at the same time more flexibility regarding formal requirements and ownership.

Currently there is only one company listed on Nasdaq Iceland within the tourism sector. Icelandair Group has been successful for the past years with its market capitalization growing eleven fold since early 2011. Companies in the tourism sector would offer investors something different from those who are already listed in Iceland and many would offer growth potential. They are, therefore likely to spur interest among investors.

Most investors investing in the stock market like good growth stories. And, while many take a more of a visionary look at particular investment opportunities, nobody likes losing money. What we do know is that companies will be founded and some of them will grow to be great. The question is how they get there. The Nasdaq Iceland market is re-establishing itself after the financial collapse with a variety of home grown companies, that generally have sturdy dividend policies. These companies have served investors well in the past years, with the OMXI8 benchmark Index rising 43% in 2015 (49% dividend adjusted) and the All-share index 38% over the same period. This process in getting the market on its feet again through the listing of established domestic industry leaders has been pivotal for its growth and increased trust. 

Once dominated by banks and investment companies, Nasdaq Iceland has currently no listed companies from the banking sector, despite a recent surge in listings. This may be about to change.

Much has happened in the Icelandic banking sector since the financial crisis of 2008, during which the three largest banks in Iceland collapsed. The Icelandic assets and liabilities of the fallen banks were transferred into new entities, forming what today are the three largest banks in Iceland, Landsbankinn, Íslandsbanki and Arion banki, and several ex-banking executives, employees and even board members have been prosecuted and jailed in cases involving market manipulation, insider trading and breach of trust.

Landsbankinn is currently owned by the government, whereas the other two are for the most part owned by the estates of the failed banks from which they arose. After the stability conditions placed on the estates in relation to the pending capital account liberalization have been met, which is expected to be in the coming months, Íslandsbanki will also be owned by the government. Arion banki will still be owned by an estate, but will need to be sold in the next three years in order for the estate to satisfy the stability conditions. As a result, all of the banks may be in the need for new owners.

There is a growing demand from politicians, the media and the public for a greater level of transparency around the sale of government assets, which supports sales through IPO’s, rather than private placements. The listing of one, or more, of the banks would be likely to strengthen the Icelandic stock market significantly and add to its growing diversity. With most of the issues caused by the 2008 crisis having been addressed, and given the positive outlook for the Icelandic economy and the banks’ domestic focus, the appetite for investing in banking stocks seems to be returning as well.

This has been highlighted in a report recently published by Icelandic State Financial Investments (“ISFI”), the state body which manages the government’s holdings in financial undertakings. The report concludes that it is likely that IFSI will recommend the government’s sale of up to a 28.2% stake in Landsbankinn in 2016, through an IPO. While it is less clear what the government intends to do with Íslandsbanki, a listing in one form or another does not seem unlikely. Meanwhile, investor groups are reportedly forming around the potential purchase of Arion banki, with the intention of having it subsequently listed on the exchange.

Last year was marked by rapid progress in the Icelandic economy and the Icelandic securities market. Supported by explosive growth in tourism, the Icelandic economy is forecast to have grown at more than twice the rate of the EU. The positive developments were reflected in a sharp increase in the OMXI8 index and substantial investments by foreign investors in Icelandic government bonds.

Statistics Iceland forecast this past November that the Icelandic economy would grow by 4.3% in 2015. The strong growth has pushed unemployment below 4% and the upsurge in tourism has yielded a surplus in trade of goods and services of about 7% of GDP. At the same time the Icelandic krona strengthened by about 8% in 2015 and inflation remained well below the Central Bank‘s target. Strong GDP growth is forecast this year (3.5%) leading to a further decline in unemployment.

The Icelandic equity market has continued its steady growth of recent years and last year saw three new listings, bringing the number of listed companies to 20 up from a low of 11 in 2010 following the collapse of the Icelandic banks. Market capitalization is a little over USD 8 billion or about half of GDP, almost four times the ratio in 2009. The positive outlook on the economy was reflected in the OMXI8 index which rose by 43% in 2015 and by 49% dividend adjusted. With a number of companies exploring listing and bearing in mind the government’s plan to sell a stake in Landsbankinn, Iceland’s largest bank, the prospects for further growth of the equity market in 2016 are good.