Dec 15, 2016 04:28 PM IST | Source: CNBC-TV18

US Fed not expanding asset base; dollar overvalued: Marc Faber

The editor of Gloom Bloom & Doom Report told CNBC-TV18 that contrary to the popular opinion that emerging markets have performed poorly in 2016, any market outside the US looks very attractive now especially in terms of valuations. Investors are too bullish about the US, and are neglecting Japan and Europe, he said.

Asserting that the central banks in Europe and Japan will keep feeding excess liquidity to the world, Marc Faber believes that the US Fed is not expanding its asset base. While European Central Bank and Bank of Japan are doing so, flows out of Europe and Japan will lead to weakening of the euro and yen and strengthen the dollar, he said.

The editor of Gloom Bloom & Doom Report told CNBC-TV18 that contrary to popular opinion that emerging markets have performed poorly in 2016, any market outside the US looks very attractive now especially in terms of valuations. Investors are too bullish about the US, negative about emerging markets, and are neglecting Japan and Europe, he said.

India is much better placed and has greater potential to grow than Western economies, Faber said. Corporate profits have still room to expand, he added.

Fundamentally, the dollar is overvalued and valuations in US markets are at historical highs, he said. Any further strengthening of the US dollar will curb the US Federal Reserve’s capability to raise interest rates, Faber said. The Fed on Thursday raised rates by 25 basis points and in the past indicated the possibility of three interest rate hikes in 2017.

Oil and mining companies, financials and tech figure among his favourite sectors for 2017, he said, adding that he sees a lot of upside potential in agricultural commodities.

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

Anuj: Are you happy that at least now we are moving away from money printing or do you think this is just one of those random rate hikes and in 2017 Fed will develop cold feet again. Your first thoughts?

A: First of all we need to understand that central banks they talk to each other. So, whereas the Fed is not expanding its asset base at the present time the Bank of Japan (BoJ) and European Central Bank (ECB) are still buying assets to the tune of approximately USD 150 billion a month. Some of that money that is kind of - as you would say printed in Europe and in Japan then flows outside Japan and Europe it causes the euro weakness, it causes the Japanese Yen weakness but it strengthens the US dollar and it strengthens the US assets.

So, basically the central bank in the US the Federal Reserve they can have other central banks print money for them for a while and then in 2017 possibly the dollar becomes too strong and the US economy rather weakens than strengthens then they can print again themselves. They have an excuse. So, basically I still maintain that central banks will keep on feeding the world with excess liquidity.

Latha: Is the central thesis that a lot of money is going to continue to slosh around and therefore we won't see too much of falls even in emerging markets (EMs), currently the backwaters?

A: We have to be very careful when we talk about markets because in general people will tell you that EMs performed poorly in 2016 and that the US was the only game in town. But let me just say that in US dollars in 2016 the Russian index was up 51 percent, Brazil 63 percent, Kazakhstan 66 percent, Thailand 19 percent, Indonesia, 19 percent, Karachi 40 percent, Vietnam 30 percent. So, some markets have actually performed very well. We turn to individual stocks some stocks have done very well in 2016 in particular the sectors that were very depressed like oil and gas and mining companies that is until recently have weakened but on the year they are still up strongly. A year ago American Barrick Gold Corp was at less than USD 6, it is still now at USD 15 after having been at USD 24. So we have had big moves in individual sectors and individual stocks.

Sonia: So what is your big call for 2017, which market or asset class do you think could be the top performer in 2017?

A: As I kind of indicated in general investors are too bullish about the US and far too negative about EM economies. I also think they are neglecting Japan and European equities so anything outside the US is probably from my perspective more attractive. Then we talk about valuations. Valuations in the US are at historically very high levels whereas else where they are relatively inexpensive valuations. So, I would focus on foreign markets and I would focus on sectors that were out of favour for a long time. The favourite in America among hedge funds were basically financial stocks and technology stocks and I would rather look at basic industries but mining companies maybe at coal, oil and gas and these sectors are quite attractive.

Latha: More strength for the US dollar or is it already way too strong?

A: It is too strong but currencies like markets they tend to overshoot in an environment where you have this much liquidity. So, fundamentally the US dollar is probably overvalued at this level already. It may overshoot further which may then cause a problem for the federal reserve because as they said they basically plan to have three interest rate increase in 2017. But if the dollar is too strong maybe they can't do it.

Anuj: I remember when I came over in May you said we are at the cusp of a massive commodity market. We have seen a lot of that play out. How much more in 2017?

A: Again it is very commodity specific. Some commodities have performed very well. Zinc, aluminium and other they haven't. When you look at all commodities then gold hasn't performed particularly well. It is the strongest currency in the world in the sense that it is still up 9 percent this year against the US dollar but it hasn't gone up like 50 percent and other commodities have had big moves especially also agricultural commodities and my sense is that agricultural commodities still have a lot of upside potential.

Sonia: What about India, what is your view on Indian markets because we have seen a fair degree of underperformance compared to developed markets this year? What are your thoughts for 2017?

A: I am against the intervention that occurred in terms of demonetisation in India on principles but in general the Indian economy when you compare it to the rest of the world let us be pessimistic and say India will grow at three percent per annum and let us be optimistic and say it will grow at 7-8 percent per annum. In either case the performance is much better than what we will have in the western world. If we can grow in the US at 2 percent per annum for the next 5-10 years that is the maximum I would expect and in Europe maybe we will have no growth so very modest growth. So, overall that in India corporate profits still have the potential to expand.

Latha: What was the in principle disapproval of the demonetisation?

A: First of all I am a believer that if you look at the global economy and the economy of individual countries the one economy that actually functions reasonably well is the underground economy where you have very few rules and where there are no regulations, that actually functions very well and it is a dynamic economy and that is precisely the economy that I will not try to destroy.

Number two, the cash that is being used for corruption is relatively modest. The big corruption doesn't occur with cash, it occurs with contracts that where government officials then get all kinds of commissions on the side and that is the big corruption. The corruption with cash is a relatively modest and irrelevant corruption and I would combat or fight this corruption with other means than abolish bank notes.

Latha: You told us that agriculture commodities is something you would be positive on, oil and gas stocks is what you would be, mining companies, perhaps. What would you avoid in 2017 other than of course US equities?

A: Numerous people have compared victory of Donald Trump to Ronald Regan who became US president in 1980 and started his job in 1981 and they say well there will be a Trump bull market like the Regan bull market in the 80s. First of all when Regan got elected the market rallied into November 28 1980 but afterwards it went into bear market for two years until August 1982 and then afterwards I admit it had a huge bull run until 1987, Dow Jones from 800 to 2,700. But the point is that in November 1980 when Regan got elected there was a huge change in leadership. A wave from oil and gas which at that time made up to 28 percent of the S&P 500 to other stocks to this inflation beneficiaries and regardless of how you look at the world whether you are positive about Trump, negative or positive about the US dollar regardless of that that we are reaching a point which is also supported by the recent market action where we have a huge change in leadership away from stocks like Facebook, Amazon, Netflix, Google to more basic industries to come out of their related companies.

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