According to Investment Guru, Marc Faber, the emerging markets may get oversold in the next six months and then see a rally. New highs are pretty much out of question, he told CNBC-TV18. Some EMs can still drop 30-40% from the current levels, he added.
Precious metals are still relatively attractive, Faber said. The Sensex may test 14,000 before slipping to 12,000 levels he said.
Excerpts of CNBC-TV18’s exclusive interview with Marc Faber:
Q: It’s been a tough start for the year for emerging markets. What do you expect 2008 to show up for us as a performance?
A: In general, markets won’t perform particularly well, whereby bear markets are characterized by stronger rallies from time to time. I think we can get oversold sometimes in the next few months and then have a rally. But I think that new highs are pretty much out of the question. That would eventually be lower everywhere than what we are now in emerging markets.
Q: Would you say, from what you have seen, that there are signs of a bear market developing across many equity markets?
A: What we had so far is actually a relatively minor decline, we have been going down in the S&P in the US for about 20%. In emerging markets, we are also down to something like 20%. But the difference is that, the S&P, when it went down 20%, hadn’t gone up all that much. Whereas, emerging markets, they are essentially way overboard and way over their long term trend lines. So I think that in many cases, some of the emerging markets could still drop about 30-40% from the present levels.
Q: That would include India I imagine, what do you think will be the catalyst for this deep correction mark that will take it so much lower?
A: Markets move up and down and sometimes it doesn’t take much of a catalyst to make the move down. But in general, what we had in the period 2001 - 2007 is ultra expansionary monetary policies in the US that led to a very strong credit growth responsible for that. We shouldn’t forget about the Federal Reserve’s irresponsible monetary policies. So during the credit expansion, leverage increases. asset prices go up and risk appetite increases and it drives all asset prices.
In particularly what also happened is that the current account deficit in the US was growing very rapidly and created the so called excess liquidity in the world from which all asset markets, including commodities and real estate stocks. Now, because of essentially slower credit growth and in some sectors even a credit contraction, we have the opposite, we have a process of tightening lending standards and of de-leveraging. That in general leads to lower asset prices although the Fed is doing its best to essentially create money, to print money which is the cause of the problem in the first place.
But the Fed is out of its mind, they try to solve the problems with money which created the problems in the first place. I think the private sector is essentially tightening lending standards and reducing risk appetite and that leads to essentially lower markets.
Q: There are some who argue, that in a situation that is developing in the US that you eluded to, and with the Fed cutting rates, there is probably more safety or less risk in investing in an emerging market that is still holding its growth levels. How would you react to that argument?
A: I think this is a total misconception. In general, emerging economies have of course faster growth rates, if we look at 5-10 years henceforth. But the markets can be very volatile and they co-relate closely with the S&P, certainly in the last couple of years. If you look at India, we went from an index of 3,000 to 21,000 between 2003 and this January.
We can easily have a 40% correction from the 21,000 levels or even a 50% correction and that would not necessarily mean that the long-term upward trend in Indian equity is disturbed. You can easily have 50% corrections in bull markets. But to sit there and say, the US has problems and we don’t have any problems is ridiculous.
Q: The other facet of what’s happened across asset classes is that commodities have had a very big run, whether it’s crude or gold. Do you think for 2008, this will be generally the best asset class or the highest out performing asset class?
A: I think that gold is still attractive, I don’t think it’s terribly overvalued. If you have a money printer like Mr Bernanke at the Fed, who really doesn’t understand anything about economics, who essentially just prints money whenever there is a problem, of course that lowers the value of paper money against say money that can't be multiplied as easily.
The gold supply is limited and so obviously, the dollar goes down against gold or, if you turn it around, you can say gold goes up against the dollar. But in general, I think precious metals are still relatively attractive, but all these are also overbought now and probably due at some point for a correction.
Q: At these levels and prices, for now, emerging markets would be an avoid for you or would you look at some of them, selectively?
A: I mentioned a while ago that the Indian markets have formed kind of a wedge between November 2007 and January 2008. Then it broke out on the upside above 20,000 to 21,000, but the minute it broke down below 20,000, it was a perfect sell signal. Usually, when you have a false upside break out, the reaction on the downside will be very strong. I think in India, we could easily revisit around 14,000 first and then probably eventually between 13,000 and 12,000 on the index.
Precious metals are still relatively attractive, Faber said. The Sensex may test 14,000 before slipping to 12,000 levels he said.
Excerpts of CNBC-TV18’s exclusive interview with Marc Faber:
Q: It’s been a tough start for the year for emerging markets. What do you expect 2008 to show up for us as a performance?
A: In general, markets won’t perform particularly well, whereby bear markets are characterized by stronger rallies from time to time. I think we can get oversold sometimes in the next few months and then have a rally. But I think that new highs are pretty much out of the question. That would eventually be lower everywhere than what we are now in emerging markets.
Q: Would you say, from what you have seen, that there are signs of a bear market developing across many equity markets?
A: What we had so far is actually a relatively minor decline, we have been going down in the S&P in the US for about 20%. In emerging markets, we are also down to something like 20%. But the difference is that, the S&P, when it went down 20%, hadn’t gone up all that much. Whereas, emerging markets, they are essentially way overboard and way over their long term trend lines. So I think that in many cases, some of the emerging markets could still drop about 30-40% from the present levels.
Q: That would include India I imagine, what do you think will be the catalyst for this deep correction mark that will take it so much lower?
A: Markets move up and down and sometimes it doesn’t take much of a catalyst to make the move down. But in general, what we had in the period 2001 - 2007 is ultra expansionary monetary policies in the US that led to a very strong credit growth responsible for that. We shouldn’t forget about the Federal Reserve’s irresponsible monetary policies. So during the credit expansion, leverage increases. asset prices go up and risk appetite increases and it drives all asset prices.
In particularly what also happened is that the current account deficit in the US was growing very rapidly and created the so called excess liquidity in the world from which all asset markets, including commodities and real estate stocks. Now, because of essentially slower credit growth and in some sectors even a credit contraction, we have the opposite, we have a process of tightening lending standards and of de-leveraging. That in general leads to lower asset prices although the Fed is doing its best to essentially create money, to print money which is the cause of the problem in the first place.
But the Fed is out of its mind, they try to solve the problems with money which created the problems in the first place. I think the private sector is essentially tightening lending standards and reducing risk appetite and that leads to essentially lower markets.
Q: There are some who argue, that in a situation that is developing in the US that you eluded to, and with the Fed cutting rates, there is probably more safety or less risk in investing in an emerging market that is still holding its growth levels. How would you react to that argument?
A: I think this is a total misconception. In general, emerging economies have of course faster growth rates, if we look at 5-10 years henceforth. But the markets can be very volatile and they co-relate closely with the S&P, certainly in the last couple of years. If you look at India, we went from an index of 3,000 to 21,000 between 2003 and this January.
We can easily have a 40% correction from the 21,000 levels or even a 50% correction and that would not necessarily mean that the long-term upward trend in Indian equity is disturbed. You can easily have 50% corrections in bull markets. But to sit there and say, the US has problems and we don’t have any problems is ridiculous.
Q: The other facet of what’s happened across asset classes is that commodities have had a very big run, whether it’s crude or gold. Do you think for 2008, this will be generally the best asset class or the highest out performing asset class?
A: I think that gold is still attractive, I don’t think it’s terribly overvalued. If you have a money printer like Mr Bernanke at the Fed, who really doesn’t understand anything about economics, who essentially just prints money whenever there is a problem, of course that lowers the value of paper money against say money that can't be multiplied as easily.
The gold supply is limited and so obviously, the dollar goes down against gold or, if you turn it around, you can say gold goes up against the dollar. But in general, I think precious metals are still relatively attractive, but all these are also overbought now and probably due at some point for a correction.
Q: At these levels and prices, for now, emerging markets would be an avoid for you or would you look at some of them, selectively?
A: I mentioned a while ago that the Indian markets have formed kind of a wedge between November 2007 and January 2008. Then it broke out on the upside above 20,000 to 21,000, but the minute it broke down below 20,000, it was a perfect sell signal. Usually, when you have a false upside break out, the reaction on the downside will be very strong. I think in India, we could easily revisit around 14,000 first and then probably eventually between 13,000 and 12,000 on the index.
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