All asset classes are vulnerable as things stand, says Marc Faber

The global equity markets saw a major sell-off last week with the Dow Jones Industrial Average (DJIA) slipping into bear terrain. The Nifty50 index hit a lower circuit on Friday as panic spread. MARC FABER, editor and publisher of The Gloom, Boom & Doom Report, tells Puneet Wadhwa that investors are too complacent about the impact the coronavirus pandemic might have on global economic activities. Though the markets may see a strong rebound in between this slide, they will be unable to reclaim the highs. Edited excerpts:

How do you see the global financial markets play out in the backdrop of coronavirus pandemic?

The global markets have slipped quite a bit from the top on the back of coronavirus fears and what it may do to the economies. I think the market has significant downside risk. Most markets are already down 20 per cent from the top and there are chances that most will fall 40 per cent from the top. That said, there can be a strong rebound in between this slide, but we will be unable to reclaim the highs. 

All asset classes are vulnerable as things stand. Investors are far too complacent about the impact the coronavirus might have on global economic activity. In the context of the current US stock market speculation, I wish to emphasise that it may be a huge bubble, as some pundits maintain, but this is nothing new since periods of excessive optimism and speculation have been a regular feature of capitalism and free markets.

Do you expect global economies to slow down further?

The World Health Organization (WHO) has already declared COVID-19 a pandemic. I have always maintained that the global economy is slowing. For the last nine months, the statistics from Asia have pointed to a meaningful slowdown. Coronavirus is the health scare that became a trigger for the markets to tumble. The pandemic has come during a highly speculative phase in the US stock market which has been characterised by extreme optimism. I find this optimism among investors to be misplaced, given that numerous economic indicators were already weak before the late December 2019 coronavirus outbreak.

So, is it all gloom and doom?

Stock investors must realise that we are dealing with the COVID-19 pandemic at a completely different phase of the stock market cycle. Severe Acute Respiratory Syndrome (SARS) occurred after a gruelling bear market and provided a buying opportunity for stocks around the world — including Asia. Currently, we are at a totally different stock market juncture. We are also at a different phase of the economic cycle. 

I consider pricey markets, such as Hong Kong and New York, to be vulnerable.
 

What about India? Is it a relatively safe haven in these times?

I don’t think so. The Indian markets have been expensive and they are not insulated from whatever is happening globally. India has just started to report coronavirus cases and I feel the country is under-reporting the number of people infected with the virus. Once more cases come out or are reported, the markets will react. India is as vulnerable, if not more, as other markets. The recent economic data has been very disappointing. The Indian economy can worsen further. That’s because the global economy is weakening and India is not decoupled.

How do you see the response of global central banks to these developments?

Investors’ optimism rests on the belief that the worse the global economy is affected by COVID-19, the more central banks will print money and the more stocks will move up. However, when I look at economic indicators like Hong Kong tourist arrivals, I have to ask myself: For how long will investors ignore these dire fundamentals? The answer, of course, is: It depends on how long the current pandemic lasts, and on whether there is any permanent damage.

So, what is your investment strategy? 

I still own my long-term Treasuries, and believe that yields could still decline to possibly less than 1 per cent for the US 10-year note. The coronavirus pandemic is a watershed moment. Therefore, I am continuing to reduce my positions — even in European utilities, which have done fantastically well since late last year. I continue to hold precious metals, although a correction is overdue here as well.

What’s your view on gold and oil?

Oil prices in the US have tumbled and it is difficult to predict the bottom yet. The stakeholders — Opec+, especially Russia and Saudi Arabia — can come back to the table and renegotiate, but I don’t see oil prices heading back to the $70 a barrel mark anytime soon. That said, given the weakness in the economy, it is likely to remain at the current levels or head even lower. When everyone sells everything, even gold will not be insulated. So, if equities fall 40 per cent from the top, even gold prices will correct, but not as much. Maybe, they drop 10 per cent from the current levels as all other asset classes see a sell-off.