The uptrend in global equities has been phenomenal since the end of last year and it has continued into the New Year. Marc Faber, Editor & Publisher, The Gloom, Boom & Doom Report and Investment Guru believes the market at the moment remains very frothy and it is to be seen whether it approaches a longer term top or just a short term peak. He is careful about the current phase and thinks indiscriminate buying would not be the right call at the moment.
Faber further added that he sees around 10 percent correction in global equities. "My scenario for 2013 is either the market will make a peak relatively soon which will not be exceeded or we have a correction of a month or two and then another strong rally into August," he explained.
Going ahead, Faber feels, "There is a chance that in order to actually punish central bankers, markets would become extremely overheated and then crash."
Here is the edited transcript of the interview on CNBC-TV18.
Q: You sounded a bit cautious of late. Tactically, are you expecting a phase of risk-off in global markets anytime soon?
A: We had a huge rally since November and it has basically begun in March 2009 for most markets. I think that the markets are getting very frothy at present and whether this is approaching a longer term top or whether we have just a short-term peak, the correction remains to be seen. But, in general, I would be careful of buying indiscriminately in this market.
Q: Would you be expecting a 10 percent kind of correction in global equities across the board or do you think it may not be that deep?
A: Yes, we could easily see 10 percent correction. We have seen over 30 percent correction in Apple. So it is a reminder that stocks move up and they can also move down. My scenario for 2013 is either the market will make a peak relatively soon which will not be exceeded or we have a correction of a month or two and then another strong rally into August, such as we had in 1987 when the Dow Jones between January 1987 and August 1987 increased by 41 percent. However, it then lost 40 percent in two months.
I think there is a chance that in order to actually punish central bankers, markets would become extremely overheated and then crash.
Q: What do you think both outcomes are contingent on? Do you think it is the fiscal cliff issue that will be crucial in determining what happens to equity markets or something else?
A: I think that the global economy will be crucial and also what happens to China. Do not forget, if the Chinese economy does not recover or recovers for a while, for say a couple of months and then slumps again or decelerates significantly, it would have an impact on raw materials and in this case on the economies of the raw material producers or the resource producers of the world. We could have a shock for the global economy.
Q: Do you think this correction might be equal for markets across the world? The criticism of the Indian market right now is that it was one of the biggest outperformer last year, which is why it perhaps looks more vulnerable this year?
A: In general, I would be careful of markets that have performed superbly last year such as Turkey and Thailand. They are in my opinion, becoming slowly overheated. I am not so sure to what extend India is overheated because currency adjusted, we are still way below the peak in 2007.
But, in general I would argue you should buy equities when everything looks horrible and when investors cannot see why the markets would go down. That is the time to be careful because there is always something that will happen to send stock prices down.
Q: You have described two scenarios. One is a correction now and then maybe a grind of a year and the other one was a rally into summer and then a bigger correction. Which one would you assign a higher probability to?
A: If we had a very strong rally into the summer, as was the case in 1987, I would not then look for a correction. But, I would look for a very significant market decline to follow. However, the more likely scenario is in my view a strong rally into the summer. First, there will be a correction, then this rally and then a more significant top in 2013 which will not be exceeded for a while.