No plans to invest in India at current levels: Marc Faber

Interview with Editor and Publisher of The Gloom, Boom & Doom Report

The flaring up of geopolitical tensions between North Korea and the United States has kept global investors on the edge in the past few weeks. MARC FABER, editor and publisher of The Gloom, Boom & Doom Report tells Puneet Wadhwa in an interview that the present situation might not blow up into a full-fledged war, but it will continue to remain tense. Investors should look to protect against losses, instead of eyeing huge returns right now, he advises. Edited excerpts:

What is your reading of the geopolitical situation, especially between North Korea and the US?

I think investors must understand that North Korea exists only because of China. It does not have its own technology or money and depends mostly on imports from China. I think there are three-four major players in the Korean peninsula. First, there are North and South Korea. I don’t think there is a strong will on the part of South Korea for a unification. It has realised that will be a very costly affair, so it is lukewarm to the idea. Then there is the US, which has interests in South Korea and Asia in general; exactly why, we don’t yet know. The US thinks it should be a world power and have its army and navy in Latin America, Eastern Europe, Asia, etc. 

And then we have China, by far the most important country economically. Most countries in Asia export more to China than to the US. From the Chinese perspective, the missile system based in Korea is clearly an act of aggression. Yet another player in all this is Russia, which shares a border with North Korea. Neither China nor Russia or Japan wants to have a very strong North Korean peninsula – either economically or politically. While they are all quite supportive of North Korea, they want to maintain this peninsula as a route to South Korea and Japan. The Japanese, in my view, look at Koreans as barbarians.

That said, missile tests have intensified since the US stationed the scud missile system in South Korea but clarified it is not for aggression purposes. That is not the Chinese view, though. The tension in the Korean peninsula will stay elevated, but I don’t think the situation will come to a war.

In such a tense geopolitical atmosphere, do you think the US Federal Reserve is in a position to start unwinding its balance sheet in 2017?

It could, but I don’t think it will. If you look at the recent economic data, even though the gross domestic product (GDP) numbers came in at three per cent, no one believes these numbers anymore. The bond market in the US is naturally very strong. The other statistics – car sales, housing, retail and restaurant sales – have all been on the weaker side. That apart, capital spending is missing. I don’t think the US Fed will move to reduce the balance sheet. It will not increase the rates even this year. It might raise them next year, but not meaningfully, by just 25 basis point (bps).

What is your forecast for global growth in FY18?

I think there are only two regions in the world that can grow at rates between four per cent and eight per cent over the next 10-20 years – India and China. This means we are talking about nearly two billion people that can grow at that pace. Then we have countries in Southeast Asia, Vietnam, Cambodia and Laos that will grow at three to six per cent. Countries like Indonesia and those in Latin America could grow at three to seven per cent. The US and Western Europe, in my view, will hardly grow.

Which regions are you investing in right now? What is your global pecking order in terms of investment? 

I am a bit embarrassed to say this as an investment advisor and an economist that I missed on the cryptocurrency boom. But I think it is a bubble – just like the Nasdaq bubble, or the gold bubble in the 1980s. Though this bubble can go on for a while, I admit I missed investing. There was really an opportunity to make money – even 50 times over.

My portfolio is diversified into equity, real estate, bonds, cash and precious metals. I haven’t done a lot. Recently, I increased my position in Chinese equities. My theory a year ago was that emerging markets will significantly outperform the US. I also increased the allocation to precious metals. I also have quite a large exposure to stocks in Singapore. I started buying Malaysian stocks towards the end of 2016. So, that has been my investment strategy.

I said a number of times last year that the US stocks were overvalued – both in terms of price and valuations. European markets, in relation to the US, were depressed last year. They also appear depressed if I look at the dividend yield of the European shares compared to the bond yield of the European-governed countries. Therefore, I increased my allocation to Europe as well, in the belief that the euro would strengthen against the US dollar. 

Can you tell us about your investments in India via the India Capital Fund? Are you looking to increase/trim your holdings here?

I have a relatively positive view of India in the long run. The markets’ recovery from the 2013 lows with a jump of nearly 88 per cent in dollar terms is high. I don’t think I will increase my allocation to India at the current levels. Many high quality companies, such as those in the consumer goods space, sell at 50 times their earnings.

That said, I am also unsure what the Reserve Bank of India (RBI) will do in terms of its monetary policy. I had very high regard for Raghuram Rajan. But now, who knows whether this tight monetary policy will continue to be implemented. India’s currency stability is very important, but a pressure from politicians is also at work.

Recent government data indicated that nearly 99 per cent of the demonetised currency came back to RBI. What are your views on demonetisation now?

Well, some observers in India have noted that it was a complete failure. I tend to agree that the way in which it was implemented was a failure in the sense that rich people were not impacted negatively, while small shopkeepers and farmers were the worst hit. Of course, the government will say that demonetisation was a huge success, the implementation was a problem. 

The issuance of bank notes, as I have seen in a number of countries, is a long-drawn process that can take even up to a year. The way the Narendra Modi government implemented demonetisation does not make any sense. That said, I am 100 per cent sure that some academic from either Harvard or Princeton University would have advised the government for this move, against Raghuram Rajan’s views.

The latest GDP figures for the first quarter of 2017-18 suggest a massive drop in India’s economic growth. Can this slacken further, given the lingering impact of demonetisation and implementation of the goods and services tax (GST) Bill? 

I don’t pay much attention to GDP. Measuring it is a complex process and data need to be adjusted for inflation. The data are subject to a number of arbitrary adjustments. In general, one of the problems I see is that, aside from the government, capital spending has been relatively weak. And this has been a disappointment. Capital spending has been missing in most global economies. But in a country like India, which is in relatively early stages of development, this surely is a big disappointment. I was very positive on the Indian market last year, when the S&P BSE Sensex was around 24,000. Now, with the index at around 32,000, I am not interested in investing anymore. That said, I believe that in India – as in other parts of Asia – there are lots of investment opportunities in real estate.

From an economic and stock market perspective, how do you rate the Modi government’s tenure so far? 

It is always difficult to tell how much power the prime minister in India really has. In general, the economy and investors are quite positive about him. I would share that kind of a positive view. In America, anything is better than the Clinton clan. Likewise, in India, anything is better than the Gandhi clan.

So, what’s your advice for stock market investors now?

We have been in a bull market – in stocks, bonds, real estate, art and collectibles – for a long time. India and China had bottomed out ahead of most global markets. Asset markets, with a few exceptions, are very high. Investors should now begin to look at the money they have made and protect the downside. Investors should not nook at making huge returns right now. They should rather protect against losses. I would take money out of the assets that I feel are trading very high.