Analysts on D-Street might feel that the rally has just started in Indian equity markets and high valuations are not something which bothers them but Marc Faber, the editor of "The Gloom, Boom & Doom Report beg to differ.
“The valuations for the equity markets are high at the moment. It was attractive when Sensex was trading below 23,000 but would still invest in India rather than the US for next 10 years,” he said in an exclusive interview with CNBC-TV18.
The valuations for the Indian equity markets are high at the moment and investors should be careful while evaluating stocks as some are expensive, he said.
Talking from an Indian point of view, Faber said that the valuations are somewhere close to 50x earnings which is on the higher side. However, that is still not alarming because we have seen Japanese market selling off after going towards 70-80x earnings and the during the Nasdaq bubble Nasdaq was sold at 70x earnings.
We can still go up in terms of India markets but once we start paying 50x earning for a stock, in that case, everything has to go perfectly well to justify that valuations, explained Faber. I wouldn’t buy stocks at 50x earnings, he said.
Even though Indian market might be trading at valuations which look slightly expensive but Faber said he would still choose to invest dues to political stability.
In the last interview back in 2016 I said that Indian market will outperform the US in next 10 years and I still maintain that, said Faber. Although, the index has rallied over 40 percent since last July and valuation typically looks on the higher side.
The market was attractive when it was trading between 23000-24000. We have now gone up to 32000 which does not look typically attractive. But, if you put a gun to my head and ask me – should I invest in a country like US or India – I would say India who has a leader who is gradually implementing reforms amid opposition and corrupt officials.
On the sector front, real estate sector still looks attractive and can still go up for a while even when stock markets top out. Banking stocks are also reasonably attractive.
Below is the verbatim transcript of the interview.
Latha: As we have all been discussing, many equity markets from US to India are trading at all-time highs. Are you generally comfortable with valuations or are any of these in bubble territory.
A: In general, equities are high in terms of valuations, but not a remarkably equally high and within markets, not every stock is equally expensive. So we have to be very careful about the fact that stocks are expensive or they are cheap. Some stocks are very expensive and some stocks are not that expensive.
Anuj: In India, we have seen the Nifty hit the 10,000 mark. You have been very bullish on Indian market, but are you comfortable with current valuations?
A: Again, it depends. Some Indian valuations, as you know, are around 50 times earnings which I would regard to be on the high side. These stocks may not necessarily collapse right away, maybe actually they go to 60 times earnings or 70 times earnings. We had, at the peak of the Japanese market in 1989, the market selling at between 70 times and 80 times earnings and during the Nasdaq bubble, the Nasdaq sold at more than 70 times earnings. So, we can still go up. I am just saying once you pay 50 times earnings for a stock, everything has to go perfectly well to justify that valuation. And I would not buy stocks at 50 times earnings.
Reema: So, are you buying anything in India right now and if yes, what?
A: As you may have realised, I always had some investments in India. And in the summer of 2016, when CNBC India interviewed me, I said in the next 10 years, I think the Indian market will outperform the US and I still maintain that. Since the lows last year in June-July, the index is up 42 percent. And we are probably on the high side. The market was attractive when it was below 23,000, between 23,000 and 24,000. We have gone up to over 32,000. I do not think the market is particularly attractive.
But if you put a gun to my head and you ask me, should I invest in a country like the US, with the kind of government they have, corrupt like hell or should I invest in India, which has nowadays a leader that is gradually implementing reforms against the opposition of course, of vested interests and corrupt government officials, but nevertheless is trying, then I would say for the next 10 years, I would rather invest in India than in the US.
Latha: Let me ask you something more general. What will be your top three asset classes or markets globally since you invest globally? Would you like gold, would you like emerging market bonds, European equities?
A: In general, when I considered that actually gold is up substantially from the lows in 2015-2016 at the beginning of the year. The price of gold is up 20 percent and this year, is up close to 10 percent. In other words, for the last 1.5 years, it is up 80 percent. Considering this, the sentiment about gold and other precious metals is very negative. So, I would say gold shares and mining stocks, even oil shares and precious metals physical are, in my opinion, relatively attractive.
Then there is real estate. In India, the real estate in cities like Mumbai and Delhi may be very expensive, but in other cities and in resorts, it may not be all that high. And usually, what happens, if you have a mania, an asset bubble, after the stock market peaks out, real estate can still go up for a while, it can also go down, but for a while, it can still go up. So I regard real estate in selective locations still being attractive.
Anuj: You are always also bullish on the metals and commodities in general. Do you think the metals could go a bit higher from here?
A: Yes, commodities peaked out in 2011 and have been in a bear market and then it sold off considerably and recently they gained some strength. But I think this trend may continue and I would actually, as I said, invest in some mining companies and also in some producers of these metals including steel, aluminium and of course, also copper.
Reema: You said that you will not buy any stock which is valued at 50-times earnings. Let us talk about stocks which appear lower than their mean valuation. IT, for instance, they are trading cheap because of the digital challenge or banks are trading lower because of the bad loan problem, which of course, the government is trying to resolve. Is there anything you like in the distressed spaces?
A: I have recommended in the past, banks and I still think there are reasonably attractive in a country like India. They will of course, also fluctuate, but from a longer term perspective, I would be quite happy to hold Indian banks. Number two, I think the insurance industry is attractive. And then of course, in India what will come up and also thrive are e-commerce companies and internet related companies. But I am not an expert. For that, you have to ask someone who is an expert in that field. But as I said, there are still some attractive opportunities.
Latha: Only for the near-term, do you think the dollar has sold off too much?A: That is a good question because Indians are not used to having a strong currency. But quite frankly, I do not see any reason anywhere in the world why the US dollar should be a strong currency. So, I would be quite happy to own rupee, but of course, industry and corrupt government officials who go to the RBI and argue over the currency too strong and this and that, but I hope that the policy that was implanted underneath Rajan will continue and that way, keep the currency stable which is the most important. And by the way, against the US dollar, the rupee has been strong, but not against the Euro.