Frontier comes in from the cold

photo of an ice field

Ottawa, Canada

Recently, news headlines indicated that Iceland is coming out of its economic isolation and will be reclassified by index providers as a “frontier” country1. Most investors are likely scratching their head at this point: “Iceland, really? A frontier country?” It may seem a bit odd, but as we have learned this past year in the case of Saudi Arabia – a $500 billion cap stock universe that was not in any index – determining index classifications is a mix of art and science. In Iceland’s case, the country went through a deep economic recession following the 2008 global financial crisis that included closing access to its capital markets; as a result, Icelandic equities exited all global indexes. Now in its recovery phase, Iceland has opened its capital markets to foreign investors, and part of that opening is receiving a “frontier” designation.

Should frontier investors care? In my view, yes: for a bottom-up stock investor, the more stock opportunities, the better. As well, a country such as Iceland, which is part of the E.U. and has an economy based on fishing and tourism, can provide positive portfolio diversification benefits. (Although the inclusion of Iceland in the frontier category tends against my suggestion in last month’s blog that the frontier EM index is becoming “purer.”) And given its small size, most global investors are likely to ignore Icelandic equities; that could provide more alpha opportunities, because this market will likely be less efficient in its pricing mechanisms than a country like Canada, for instance.

How then should we think about the opportunity in Iceland? My approach to Icelandic equities, as shown in Table 1, is to group the stocks with the Baltic countries, which include Estonia, Latvia and Lithuania. All these countries have small Nordic-based populations, small market capitalizations and high correlations to E.U. equities. Key differences for Iceland, however, include having its own currency, a much (relatively) higher market cap and better trading liquidity.

Like the Baltic opportunity set, Iceland will likely be a source of cyclical trades, rather than the structural growth opportunities in places like Vietnam and Africa. The economy is fairly developed, and population growth is fairly mature (and even negative, in places like Estonia). Still, as I have said before, what is most important is a market of stocks, not a stock market: any country can offer great stock opportunities, and Iceland is no exception. As shown in Chart 1, one can find great top-performing companies in any market – in this case, Marel, the largest company in Iceland, a diversified fishing equipment producer.

I am planning a trip later this year to visit companies on the ground, and investors may soon see Iceland on the Fund’s country listings.

Thanks for reading.

Adam J. Kutas, CFA


Table 1: Iceland compared with Baltic countries
Country comparison Iceland Estonia Latvia Lithuania
Market cap (US$ billion) 11.1 3.1 0.9 4.2
# Stocks 23 18 22 30
3M ADTV (US$ million) 24.4 0.7 0.1 0.5
P/E - LTM (x) 20.3 14.9 11.8 12.0
P/B - LTM (x) 1.74 1.20 0.96 1.16
Dividend yield - LTM (%) 1.23 3.58 4.16 5.48
Correlation with MSCI E.U. Index 87% 84% 90% 95%
Population 337,780 1,306,788 1,915,259 2,876,475
Currency Icelandic Krona Euro Euro Euro
Pre-euro currency NA Kroon (Till 2011) Lats (Till 2014) Lithuanian Litas (Till 2015)

Source: FMR (as of August 5, 2019)

Chart 1 – Marel h.f., the largest company in Iceland

Marel price chart from Aug 2014 to June 2019 - showing upward trend

Source: FMR.

1 MSCI (Results of the MSCI 2019 Market Classification Review, June 2019)

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