An interview with Marc Faber
*How do you read the current correction and pull back in the Indian equity
The market had risen from less than 3,000 points in 2003 to nearly 15,000
points recently. We had a 26 per cent correction in 2004, a 13 per cent
correction in 2005, and a 30 per cent correction in May-June 2006.
So far we have declined by 13 per cent from the February 11 peak (as on
March 5) and the question is obviously whether this is just a correction or
the beginning of something more serious.
Based on the position of overseas markets and international liquidity, I am
leaning toward the view that we are faced with something more serious.
*There are a lot of worries on inflation and rising interest rates in India.
These could have a negative impact on the equity as well as corporate
profits. In this scenario what is your outlook for calendar year 2007?*
It looks as if most asset markets around the world, including the Indian
stock market made a high between November 2006 and February 2007. And
whereas since 2002 the right strategy was to buy the dips, from now on
investors should sell the rebounds.
Once the Dow is down by 10 per cent, I expect the US Federal Reserve to
begin cutting interest rates and that this may lead to a sharp rebound in
stock prices around the world.
However, I doubt that we shall make new highs. So, my expectation is for the
present downturn to last for between one and three months.
This will be followed by a strong rebound, which will then give way to
renewed weakness in the second half of the year. I may add that India, while
having a great potential, is certainly not problem-free with inflation
accelerating and a not particularly investor-friendly Budget!
*Would you agree that India is witnessing a secular bull run, which could
last for many years or will it deflate?*
It is possible that India and also other emerging markets are in a secular
bull market. However, we should keep in mind that India rose from the lows
in 2003 to its recent high by almost five times.
Valuations are not compelling when compared to other markets and when
compared to local interest rates. Moreover, even if the secular bull market
story is correct, which I somehow doubt, big intermediate corrections or
even bear markets can interrupt this glowing scenario.
*How do you see global liquidity going forward?*
Global liquidity, coming principally from the US current account deficit, is
still there. But it is no longer expanding at an accelerating rate.
Moreover, we have some illiquidity that developed in the US sub-prime
lending sector. This means, in my opinion, across the board tighter lending
standards - leading to less liquidity. It is not the Fed that tightened
liquidity, but the market place.
*What will be its impact on global stock markets in general and India in
When liquidity expansion slows down usually some problems occur in asset
markets. Moreover, nothing boosts liquidity as much as rising asset prices.
It is when asset prices decline that liquidity can vanish very quickly.
*What is your advice for the retail investor in India?*
My advice is to sell at any rebound.
*Where do you think the commodity cycle is headed, especially gold?*
Since all asset prices including real estate, equities, bonds, commodities,
art, and even the prices of mistresses increased in value since October
2002, I would expect in an environment of relative tighter liquidity all
asset prices to decline - even precious metals.
*Gold ETFs have recently been introduced in the Indian market. Could you
please share your experience and whether retail investors should look at
I am still positive about gold and silver in the long run. However, a better
buying opportunity should occur over the next three months.
*Do you see any particular investment themes, which can work over the next
two-three years in India?*
I think the key will be to avoid losing money. I like cash and possibly
bonds should do okay in India.
*Do you see Indian markets as over-valued compared to other emerging
I am not sure the word "overvalued" is correct, but certainly the market is
"overstretched" and vulnerable to a 30 per cent or 40 per cent decline.
*In a rising interest rate scenario, how do you look at Indian real estate
prices? And investing in real estate companies?*
There has also been a lot of speculation in real estate and I would be
somewhat careful at this point. I would avoid real estate companies for now.
*Oil is no more boiling, but the opinion is still divided on its direction.
What are your expectations for this year?*
Since I expect the global economy to slow down, oil may correct down to
$45-55 per barrel. Long term, I am positive.
*And its impact on Indian economy?*
Declining prices are moderately favourable, but since I expect prices to
eventually rise significantly, I would think that it will add to the current
account deficit and to inflationary pressures.
*Indian metal companies have acquired companies abroad recently. What is
your view on the valuations and the synergies? How should investors look at
I am not sure that these acquisitions are timely and wise. I would not buy
these companies and focus on India, which has a higher growth potential.
Friday, July 20, 2007
An interview with Marc Faber