Big fish to fry in Iceland

Jack Dyson reports on a new wave of Viking invasions - only this time, the raiders are waving cheque books instead of swords.

What's happening?

For years, Iceland's only exports of note were fish, more fish, and the eccentric pop songstress Bjork Gudmundsdottir. Visitors to Reykjavik tended to be more interested in hot springs, volcanos and the Northern Lights than its prospects as a base for enterprise. Now, however, business folk tend to perk up when you mention Iceland, with good reason: its economy is on fire. The Icelandic Stock Exchange (Icex) has rocketed nearly 90% this year, making it easily the best performer in western Europe. And with GDP per capita approaching £19,000 - the sixth-highest in the world - Iceland is now one of Europe's wealthiest and best-educated nations.

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Where's the growth coming from?

Diversification and deregulation. Fishing still accounts for 70% of exports and 12% of GDP, which is why Iceland prefers to keep out of the EU, with its common fisheries policy. But in the 1980s, the government worried that the nation was too dependent on its fish stocks and began to encourage businesses to try new things. Labour and capital market reform led to a period of sustained growth. The government slashed corporation tax from 30% to 18%, cut capital gains tax to 10%, and also reduced its stakes in state-owned banks, promoting consolidation in the industry. In 2003, Landsbanki, Kaupthing and Islandbanki were all privatised outright, and are lending money to private companies, fuelling growth. Kaupthing alone has total assets of e16bn, almost twice as much as the entire country's GDP last year. With so much going on, it is inevitable that companies should start to look abroad.

So what has happened?

Iceland's big businesses have been making themselves felt in a range of sectors in the UK and Europe, from retail to banking to pharmaceuticals - building up stakes, buying companies and seeking UK listings. For example, in October, Icelandair took an 8.4% stake in low-cost flight carrier Easyjet (EZJ, 188.5p), which it subsequently raised to more than 10%. Shares in investment bank Singer & Friedlander (SFL, 282p) have been buoyed for a few months now by speculation that Kaupthing - which has built up a 20% stake - is planning a takeover. Chilled foods specialist Bakkavor has been building a stake in Geest (GET, 596.5p), the bagged salad maker, prompting similar speculation. And Landsbanki made a (failed) bid for stockbroker Numis, and has gone on record about its wish to buy UK companies.

Anything else?

Absolutely. The big story at the moment is retail group Baugur, in which Kaupthing has a 21% stake. Baugur started off building up franchise rights in fashion shops such as Zara and TopShop, selling fashion to Iceland's style-starved shoppers, who used to have to fly to Edinburgh to find decent stuff. Baugur expanded quickly, and growing competition at home meant it looked overseas for growth. Since then it has been steadily working its way through the British high street. So far, Baugur has snapped up Hamleys and fashion chains such as Oasis, Karen Millen, jewellery chain Goldsmiths, and is currently attempting to take over Big Food Group (BFG, 89.5p) - whose largest division is, neatly, the Iceland chain of food stores. Companies majority-owned by Baugur have a total turnover of £1bn and more than 10,000 employees. The latest speculation is that the group will seek a listing on the London Stock Exchange.

It can't all be good news

No. With so much growth in such a short space of time, some volatility is likely. Iceland's inflation rate stood at 3.7% in October, well above the central bank's target of 2.5%. And after a year of rapid growth, Iceland's main stock index fell for ten days on the trot at the start of November, losing 16% when investors got the jitters at its meteoric progress. Moreover, while Iceland's economy may be growing nicely, its stock exchange has been losing listings - falling from 64 two years ago to 40 today. Bigger Icelandic companies are starting to find that a Reykjavik listing is not enough, prompting Kaupthing to list on the Stockholm Stock Exchange, and drugmaker Actavis to make plans for a flotation in London.

What's the solution?

One proposal is for Icex to merge with OMX-owned Hex Integrated Markets, a stock exchange made up of the Swedish and Finnish bourses together with thoseof Estonia, Lithuania and Latvia - and which is in talks with Denmark to add Copenhagen's exchange. ICEX already shares strategic ties with OMX through the Norex alliance, and if Copenhagen joins, Icex may well follow suit.