Moneycontrol
Jan 03, 2017 04:02 PM IST | Source: CNBC-TV18

Positive on India; trade war with China a bad idea for US: Faber

Swiss investor Marc Faber is positive on India in the long term and says the agriculture and food sectors look attractive.

Swiss investor and Editor & Publisher of 'The Gloom, Boom & Doom Report, Marc Faber is positive on India in the long term and says the agriculture and food sectors look attractive.

"I think the market became oversold a week ago and we can rebound somewhat here. I do not think that the global markets will go up strongly," Faber said in an interview to CNBC-TV18. 

For global markets, he sees the biggest risk from geopolitical events. It is a bad idea for US to pick trade war with China. US consumer would suffer more from the trade war, said Faber.

According to Faber, US President-elect Donald Trump inherits hugely inflated asset markets, which too pose a risk to the US market.

US stock market has significantly outperformed other markets and it leaves it vulnerable to adjustment, he says. 

Below is the transcript of Marc Faber’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Sonia: We have big events lined up in India this month, there is earnings, there is the Budget and of course, we are still reeling under the aftermath of the demonetisation impact, something that you spoke about earlier where you said that you do not support it. What is your view on India now for at least the next six months?

A: I think the market became oversold a week ago and we can rebound somewhat here. I do not think that the global markets will go up strongly. We had actually, last year, some very strong rebounds in Russia up 56 percent in dollar terms, Brazil up 66 percent in dollar terms and then we had in Asia many markets that were up between 15 and 30 percent. I do not think this will be repeated next year. But obviously, we have this huge liquidity in the world and whenever somebody will sell something, he will buy something else. In other words, if people sell the US dollar, if people sell the US stock market, they can reinvest the proceeds somewhere else.

Anuj: In emerging markets (EM), where would India rank right now because 2016 was one of the few years where Indian market actually underperformed the EM universe by quite a margin?

A: Yes, it is not the first time that India has underperformed, but I think the outlook, longer-term and I am a long-term investor, I look ahead at 5-10 years, there are great opportunities. But I would like to point out to one thing about markets. In the last few years, there has been a trend to indexation. In other words, you just buy the index in a market. And you hope that the index will go up and the institutions by the indices because the costs are low, associated with exchange traded funds (ETF) that follow index. Whereas, active management, the fees are higher and in the last few years, the active managers have by and large, underperformed the market.

But this is going to change. If I look at last year, some sectors, and as I just pointed out, some markets have performed very well and in India it is a case of not necessarily owning the index, but owning individual sectors, as was the case in other markets last year. In the US, energy was the best performing sector and other sectors did not perform very well, say the high flyers, Netflix, Facebook, Amazon, in the second half of the year, they underperformed or even went down. So, I believe it is more a question, rather than to worry about where will the market go, but to question what sectors will do best.

And before, you had someone on your station that talked about agriculture and food stocks. I think this is a sector that is actually attractive because agricultural commodity prices are depressed, they have been going down since 2011-2012 and started to move up last year with sugar almost doubling. So there is a play in agricultural companies, plantations.

Sonia: To slightly come back to the bigger picture, what is, according to you, the biggest risk for global markets in 2017?

A: The biggest risks, in my view, are geopolitical events. It would be really a bad idea for the US to pick trade war with China. China has much more endurance in terms of enduring hardship than the US and the US consumer would suffer more from a trade war than China. The US only accounts for 18 percent of Chinese exports and in the case of steel, the imports into the US from China are only 3 percent. So you can see that actually China does not depend on steel exports to the US for its wellbeing and they could easily divert part of the exports that go to the US today to other countries.

The second risk which is frequently over looked. When Mr Ronald Reagan became president in 1981, he was elected in November, 1980, asset markets were very depressed and interest rates at very elevated level. The treasury yields in America on the 20-year and 30-year bonds was over 15 percent. So, he inherited a huge tailwind of diminishing inflation, falling interest rates and depressed assets that had a huge upside potential in the 1980’s. Trump, he inherits, and that is the biggest risk, hugely inflated asset markets. The bond markets in the developed countries, as you know, have the lowest yield they ever had in the history of mankind. The bond yields will not go much lower. Now, can the 10-years yield that has gone from 1.3-1.4 percent to 2.5 percent, can it go back to 1.7 percent or 1.5 percent? Yes, possible, but it will not go much below 0 percent.

And number two, when you look at stock markets as a percent of the economy, the stock markets around the world as a percent of the economy are at a very high level, especially in the US. In other countries less so, but in the US they are. Furthermore, the US stock market has significantly, and I repeat, significantly outperformed other markets in the world since 2011 and it leaves it vulnerable to an adjustment. The adjustment may happen with the US not going up a lot. But other markets like India, emerging markets in general, Europe outperforming the US, or it could happen with everything coming down and then the US underperforming, going down more than other markets, which actually would be my view, what will happen. This is the risk.

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