COPENHAGEN, Dec 4 (Reuters) - Following a recent lifting of capital controls, Icelanders should ramp up their foreign investments to become less dependent on the small nation's volatile economy, a major local fund manager said.
Pension funds, insurance companies and households only have 10-20 percent of their assets in foreign investments and would need to invest up to $26 billion abroad to bring that ratio to "acceptable levels" of 40-50 percent, according to Gamma Capital Management.
"I'm certain that over the next 5-10 years, they're going to aim for 40-50 percent," Chief Executive Gisli Hauksson told Reuters.
The foreign asset ratio of other small open European economies is often much higher than Iceland's, Gamma said, pointing as an example to the Baltic countries where it exceeds 60 percent.
For the north Atlantic island nation of some 340,000 people, the near-term rebalancing will be in the range of $7 billion to $9 billion, the fund manager forecast.
Pension funds alone hold assets worth 3,700 billion Icelandic crowns ($35.7 billion) or more than 150 percent of the country's gross domestic product, Gamma said.
Until abolished in March, the capital controls that were imposed after the 2008 financial crisis had hindered Icelandic investors from boosting foreign investments.
Now the allure of Iceland's own economic upswing, a strengthened currency and comparably high interest rates have deterred domestic investors from boosting foreign investment.
"It's going to be a good thing, until it goes bad," Hauksson said about keeping a large portion of investments in Iceland.
As capital controls were lifted quite rapidly, pension funds are still looking into how much capital should be allocated abroad, he said.
Iceland's interest rates will likely continue to fall, he said, predicting the central bank could lower its key policy rate by 25 basis points to 4.00 percent in December, and once more in the first quarter of 2018.
The central bank cut the rate in October for the fifth time in little more than a year to offset the impact of lower inflation.
Three parties spanning the political spectrum formed a new government last week after Icelanders ousted the former center-right government in an election in October.
Iceland's economy is now slowing down after years of strong growth, and that's good because it lowers the risk of a hard landing, its central bank chief said last month.
($1 = 103.6400 Icelandic Crowns) (Editing by Terje Solsvik and Mark Potter)