Despite accommodative central banks globally, the current market presents a tricky environment for investors.
Volatility is likely to remain elevated until we have better visibility on key market developments, notably trade tariffs and the impact on global growth.
But this is not necessarily a bad thing. With asset price volatility comes opportunity potential for investors to generate alpha, as long as investing is based on fundamentally researched views, without falling into the trap of trading off each price move or every 'tweet' for that matter.
In this sense, Iceland is a compelling opportunity from a rates and FX perspective as the full removal of capital controls (which have been in place since the Global Financial Crisis) and high interest rates should lead to investor re-engagement.
As inflows from overseas enter the market, currency strength may mean lower inflation, and this should create a virtuous cycle to push rates lower.
In the meantime, underlying credit quality continues to improve against a strong macro backdrop and positive domestic developments.
In addition, Iceland could stand to benefit from flows into its market from investors seeking exposure to strong and improving ESG names (clean energy, progressive women's rights).
However, the potential positive catalysts are not without risks. Many investors remain in a position where access to the Icelandic market is difficult due to not having the trading infrastructure in place.
Domestically, labour unions pushing for outsized wage gains could push up inflation and limit the ability for rates to fall, despite growing recognition that pay demands need to moderate and be more reasonable.
Last month, Iceland cut rates by 50bp to 4%, and further rate cuts are likely in the cycle.
Nevertheless, Iceland remains compelling in a world where investors are starved of yield and at a time when foreign investors will soon be able to start investing in the country again.
Mark Dowding is CIO of BlueBay Asset Management
• The removal of capital controls and high interest rates should lead to investor re-engagement
• Iceland could stand to benefit from investors seeking exposure to strong and improving ESG credits
• Many investors remain in a position where they are not set up to access the Iceland market
• Labour unions pushing for outsized wage gains could push up inflation and limit the ability for rates to fall