Surplus liquidity in risky assets negative for EMs: Faber

Excerpts from Power Breakfast on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Speaking about emerging markets, Investment guru Marc Faber says that he is negative on emerging markets because of surplus liquidity flow to risky assets.

"Credit spreads may widen so I am negative on economy and especially the emerging markets because that's where the surplus liquidity flows to the risky asset classes whereas the US markets have grossly underperformed. Now, it will outperform the emerging markets for a while because it goes up but because it goes down less than India and China and more periphral markets," comments Faber.

Expressing his view on the liquidity issue, Marc Faber says that the Central Banks are largely to be blamed for the excess liquidity.

"The Central Banks are largely to be blamed for the excess liquidty because the philosophy behind US monetary policy is not to target asset prices but core inflation. Nobody lives by core inflation. Asset bubbles can be very dangerous and Bernanke will print money once asset classes deflate. As soon as Dow will be down more than 10%, the Fed will cut interest rates," he adds.

The yen has appreciated against the US dollar. According to Faber, "You can cut interest rates but if lending and financial institutions tighten lending, it doesn't help very much and also the price of an asset depends on demand and supply. If demand has changed because psychology has changed and there was previous excess speculation in housing industry of buying second homes, that doesn't help. But that will weaken the dollar, US dollar is a doomed currency in the long run."

Speaking on India, Faber says that the Indian markets could see a deeper correction going forward, "I think it's more than a correction. We had a rise till about February 9-10 and then a severe decline. I think we may move lower here and that the market is quite vulnerable."