Marc Faber sees further drop in global indices

Marc Faber, who predicted the US stock market crash in 1987, said global equity markets, including the US, may fall further this year and may prompt the Federal Reserve to cut interest rates.

Faber expects the Standard & Poor's 500 Index to decline as much as 15 percent followed by a cut in interest rates in the US as the economy deteriorates later this year.

The decline in the US economy may lead to a "big selloff in equity markets around the world,'' said Faber, who oversees $300 million in assets at Hong Kong-based Marc Faber Ltd.

Former Federal Reserve Chairman Alan Greenspan said a recession in the US is possible, though not probable this year as excess inventory is being reduced quickly, according to people attending a CLSA Japan Forum in Tokyo today. Greenspan said previous experience suggests a flattening of profit margins should produce a recession.

The US Commerce Department said yesterday gross domestic product last quarter rose at a 2.2 per cent annual rate, compared with an initial assessment of 3.5 per cent growth reported on January 31.

A drop in global markets was sparked on February 27 by China's announcement of further measures to crack down on illegal investments, which sent Chinese stocks to their biggest slump in a decade. The Dow Jones Industrial Average dropped on the same day by the most since the first trading day after the September 11, 2001, terrorist attacks.

Faber says Asian markets including China and India may decline further. Some Asian markets could decline as much as 30 per cent before they become buying opportunities, he said.

"The buying opportunity will either occur 5 to 10 per cent lower or 30 percent lower,'' Faber said.

Faber expects Japan's stock market may outperform other markets this year after a poor performance in 2006.Japan's Topix index added 1.9 per cent in 2006, while the Morgan Stanley Capital International World Index jumped 18 per cent in the same period.

"The reason I'm saying this is that valuations are not terribly stretched compared to the level of domestic interest rates,'' he said. ``If the whole world markets decline, I don't think that Japan will be on its own, rising in value. But I think it can outperform the other markets.''

Faber cites Thailand as a market that is inexpensive.

Thailand's SET Index plunged 15 percent a day after the nation's military government on Dec. 18 imposed capital controls on international investors buying Thai assets, to deter currency speculation. The measure has advanced 9.4 percent since then.

"I don't think there's any catalyst for a very significant rise in the market,'' he said. "But at the same time, you can buy perfectly sound companies in Thailand that will give you dividend yield of 6 and 7 percent with price-earnings ratio of around 10 and book value that is around where the share price is or even higher than market capitalisation.''