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May 12, 2017 04:15 PM IST | Source: CNBC-TV18

Modi better than Trump; India will outperform US over 5-10 years: Marc Faber

India, according to PwC, in 20-30 years will become a second largest economy in the world similar to China.

On a day when market scaled record high on Tuesday, Marc Faber cemented bullish sentiment further by saying that India will continue to outperform the US and other western markets, he said in an exclusive interview with CNBC-TV18.

The editor and publisher of The Gloom, Boom, and Doom Report said that India has got a new government with (Prime Minister) Narendra Modi leading the charge from the front, has much better chance of implementing reforms than say US President, Donald Trump.

Commenting on the economy he said that central banks in emerging economies (EMs) such as India are much more responsible and educated about perils of money printing. RBI’s former governor Raghuram Rajan & present governor Urjit Patel have done a good job in stabilising the rupee.

Indian market is up 13 percent in local currency and in dollar terms, the market is up close to 18 percent led by a rise in the rupee. The currency is very important for foreign investors. A strong currency can pull foreign investors towards India, he said.

“I remain constructive on India and over the next 10-20 years, India has the potential to grow at 5-7 percent each year – which is huge compared to growth rate seen in the US or Europe,” said Faber.

India, according to PwC, in 20-30 years will become a second largest economy in the world similar to China. He also highlighted that only marginal amount of domestic saving find its way to Indian equity markets.

The wealthy families should at least put 20 percent of the money in Indian equities or Indian properties and direct investment because it is time to look forward.

Today, US stock market is 53 percent of the global stock market capitalisation now. But, in 10-20 years, it will be reduced to 20 percent and India and China will hog lion share up to 50 percent, highlights Faber.

Below is the verbatim transcript of the interview.

Sonia: You have repeatedly told us that you see more value in emerging markets compared to developed markets. But this has been your theory for a while now. Do you think that the story has played out or do you think that markets like India still have more steam?

A: What I maintained more than a year ago that over the next 5-10 years, India would outperform the US and other western markets. I think it is still a valid story. In general, you have a new government, Mr Modi who is trying hard to implement some reforms and he has actually a far better chance to implement these reforms than Mr Trump.

Secondly, this is something that is very interesting for me as an observer of economic history. I think central banks in emerging economies such as India, as an example, are much more responsible and much better educated about the perils of money printing. Mr Rajan and Mr Patel have done a very good job so far in stabilising the rupee. In local currency, the Indian market is up something like 13 percent this year.

But in dollar terms, the market is up close to 18 percent because first the stock market went up then the rupee went up. The stock market is not that important for the majority of Indians because it is only a minority that owns Indian shares. But, the currency is very important for the majority of Indians and for foreign investors.

If you have a steady currency, a strong currency, you have money coming from overseas, looking for investments in India and so, I remain actually quite constructive about India. And over the next 10-20 years, India has the potential, I am not saying it will realise it, but it has the potential at least to grow at 5-7 percent per annum each year which is huge compared to the growth that we have in the US and in Europe.

Anuj: That is an interesting point you brought up because that was actually my follow up question that since you do track all these currency movements as well. So, strong currency, strong market, but we have not seen too much of foreigner participation in our market. It has really been domestic liquidity or domestic money which has driven the markets. Do you think over the next six months we could create a goldilocks scenario where domestic liquidity is anyway there and even the foreigners start to participate?

A: Foreigners have also participated to some extent, but I tell every wealthy American and European family the same. India according to PricewaterhouseCoopers (PwC), the consulting-auditing firm will be saying 20-30 years, the second largest economy in the world, similar to China.

Now how much money have wealthy families in India. Maybe 2-3 percent of the money if they have USD 1 billion. Most of them have maybe USD 10 million or less in India and that in my opinion, is a mistake. They should have at least 20 percent of the money in Indian equities in Indian properties and direct investments. We do not have to look backwards, we have to look forwards. The US stock market now is 53 percent of global stock market capitalisation. In 10-20 years' time, it will be something like 20 percent of stock market capitalisation and India, China and other emerging markets will be more than 50 percent.

Sonia: At the end of the day, every bull market is predicated on earnings and economic growth. How does India stack up compared to some other markets like China and Vietnam? Are we doing better on those parameters?

A: I have to laugh because I agree with you, but in a money printing environment such as we had in Japan, in Europe with the European Central Bank (ECB), Bank of England and the Federal Reserve, you can have a bull market even if the economy is actually going down or not recovering much simply because of money printing. But, I agree with you. In principle, it is predicated on nominal gross domestic product (GDP) growth in the long run and on corporate earnings growth. And in my view, in the long run, if you take say, the US, what is the future growth rate of the US? Maybe 1-2 percent per annum.

So, corporate earnings in my view, will grow at 1-2 percent per annum in the long run, otherwise eventually, if they grow much faster than nominal GDP, corporate earnings will be nominal GDP which is not possible.

Anyway, in India, if you have growth rate – and I am relatively conservative here, some people accuse me of being too negative of Indian economy – but I am saying if India can grow at 4-7 percent per annum for the next 20 years, then earnings in my view will also grow at 4-7 percent in some corporations that are well managed. They will grow at 12 percent, maybe 15 percent. In some companies that are badly managed, maybe they will not grow at all.

So, my view is simply based on simple economics and I am not an academic at an Ivy League university. I observe what is happening in the world. But simply based on a common man economics, I think India has a good potential and I believe that foreigners will come into the market near the top and that will be the time we will have to sell Indian shares to the foreigners who will rush into India because they think it is the new El Dorado.

Anuj: Of course, India is not the best Asian market this year by the way. It is the place where you sit, Thailand. Of course, there the currency has always been strong. But, what about commodities because that is also a space that you track. I wanted your thoughts on some of the commodities like metals. The ferrous metals, the non-ferrous metals, the kind of bull-run that we have seen. Has that come to an end or do you think this is just a bit of a correction going on right now?

A: It is kind of a correction. But a correction in commodity markets, 10-20 percent is a huge move because, as an investor, you have the roll over costs and you do not have dividends on commodities basically. So, I would be a little bit careful about economic sensitive commodities such as steel, iron ore, copper, aluminium and so forth, but I still like precious metals because if you look around the world and you see all these academics and central banks.

And if the US, in the US we are now eight years into an economic expansion. This is a very old expansion. We are more than eight years into a bull market which is a very old bull market. If the market goes down substantially, we have a recession again and we expect that in the next 1-2 years, then the Fed, in my opinion, they will launch qualitative easing (QE)-IV. They may not call it QE-IV, they may call it helicopter money or Trump money or whatever it is. But I think they will print money as they have in Europe and Japan up to this very date.

Deutsche Bank has recently produced a statistic or it was Bank of America whereby in the first three months of this year, the balance sheet of the ECB and the Bank of Japan (BoJ) increased by more than USD 1 trillion. So, annually, by close to USD 4 trillion, we still have money printing and we do not know where it will end. I think it will continue because that is all they can do.

Sonia: We have been talking for many years now. I remember a year ago, you had complained about how you tried to get a visa when you were trying to come to India and the business climate was just not conducive enough. It was the toughest process for you. Since then and now, have things changed    a lot as far as the climate to do business is concerned in India?

A: I have to try to get another visa and then I will tell you. But, in general, what I hear is that there are some signs of improvement. India is not a country, it is a continent with more than a billion people. So, in one state or in one city, you may have mayor or a government that is very pro-business and in other states, you still have the socialist mentality that does not really want any improvement because the politicians extract all the money from the system.

So, it is like it is easy to introduce regulation and laws into a country and increase the bureaucracy. Mr Trump is finding the same. It is very tough to dismantle it. It is very difficult and Mr Modi has done about as much as he could, but a lot remains to be done.
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