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Profits of boom

The booming economy which is Iceland looks set to continue not only to the year end, but also into the millennium.
The reasons for this are principally twofold. First, the government is on target in virtually every chapter of its budget book, due to be published this month, and second because the Icelandic Stock Exchange is looking forward to some exciting new listings, sure to keep the index bubbling.
Regulated shares did not appear on the stock exchange until 1990, until then only bonds were traded. Over the past decade, however market equity capitalisation has grown to $3.5bn. This figure has been reached with a rollover previous 12-month increase of 16.6%.
Foreign investors unfortunately are excluded from one of the most dominant parts of the market, the fishing sector, which accounts for 31% of the listings. This is less important when one looks at capitalisation, however. For example, while transport only accounts for 15% of the listing, the shipping giant Eimskip corporation represents a staggering 10% of the market capitalisation.
Moreover, while the market has risen by 16.6% the fishing industry has shown only an 8% improvement this year. This is probably a reflection on the restructuring going on in the industry which has not been spared the vigorous overhaul taking place in Icelandic industry, in both the public and private sector.
Fridrik Magnusson, manager of VIB Securities in Reykjavik, believes that the last quarter of the year may be a little slower, however. “The market has done very well so far,” he says, “but the last quarter may be a little mixed. Not because of external influences, as the Icelandic market has little correlation with any other, but possibly because of a liquidity problem.”
He points to the financial sector, however, as a major influence on the index over the next six months. “Financials account for 30% of the listings, and a large capitalisation in relation to the rest of the market, and are undergoing massive re-organisation and restructuring. A privatisation process is under way, and this could lead to mergers in the new year. Although the programme has been delayed, it is now back on track.”
Kari Arnor Kirsson, managing director of Reykjavik-based Northern Province Labour Market Fund, broadly agrees with this assessment, but has a warning about the financial sector. “The financial sector is probably over-priced at the moment, as a result of power buying prior to privatisation. The p/e ratios of the banks are very poor, and it is a question of whether or not that is currently priced in,” he says.
What he suspects may well drive the index onward and upward is the arrival of some new companies on the market. “We have virtual agreement on the listing of Icelandic Telecom. This would radically alter the market, as it would be almost twice the size of the second company on the listing.”
There are also a number of smaller companies that are expected to seek a listing in the new year.
But there are other reasons to believe that the index will not fall before the year end. “The government’s figures are very good, with the economy growing at 5%, and unemployment down to just 2%. The latter is getting dangerously low, but the government has acted to squeeze credit and reduce domestic demand,” says Kirsson.
The bond market, meanwhile, has had something of a mixed year after being buoyant over previous years, although yields did climb in the first two quarters of 1999. Clearly equities are having an influence, but probably more to the point the government and central bank have decided that there is simply too much money out there, and that the banks are lending too much. As the main issuer/guarantor, the government has decided to act on two fronts.
Firstly introducing new regulations limiting new issues, but also acting to buy back its own issues, which is likely to make for a good market to the year end.
But if anything reflects the boom of the island it is the litmus test of real estate, which has seen property prices increase by up to 20% so far this year. This is a fact not lost on fund managers.

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