Only stupid foreigners buy Chinese shares: Marc Faber

Investment guru Marc Faber resembles nothing so much as an ageing rock star, but his outlook on the investment world is generally downbeat. The author of the Gloom, Boom and Doom newsletter typically emphasises the ‘gloom’ and ‘doom’ scenario more than the ‘boom’ aspects. But today, Faber confesses to being drawn to the Indian stock market, particularly after the recent sharp market correction. “I think the Indian economy has very favourable prospects,” he told Firstpost on the sidelines of the CLSA Asia-Pacific Markets Investors’ Forum in Hong Kong. On China, although he reckons that economic growth will be sustained in the long term, he sees a “setback” in the form a credit bubble gone bust beginning to manifest itself. Excerpts from an interaction:

On the prospects for the Indian stock market

I think we have a bear market in India, and it will go lower. But if you’re a long-term investor, each time the market drops 40 percent from the peak, you should start buying. You will then have satisfactory returns in the long run. Not huge, but satisfactory returns.

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The Indian economy, like the Chinese economy, has very favourable prospects in the long run. We’re starting from a very low GDP per capita in India - some $1,200 against $40,000 in the US. To go from $1,200 to $5000 is not difficult. But from $40,000, it’s hard to go much farther unless you print money.

On the Eurozone crisis effect

We had a bank failure in 2008 and the financial system in the western world went bankrupt. It was bailed out by governments, but the banks have learnt nothing. This is partly driven by artificially low interest rates and zero deposit rates. The banks continue to speculate on all kinds of products. What happened to UBS in London (where a rogue trader caused huge losses) can happen to any other bank.

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I have lots of clients and readers of my newsletters, and I don’t know anyone who owns Greek bonds. So why do the banks - particularly French banks - hold Greek bonds and Portuguese bonds and Spanish bonds and Italian bonds? This shows the banks have learnt nothing.

There has to be a separation of banking activity. They can have, on one side, investment banking activity - they can call themselves UBS Giant Hedge Fund; on the other side, the banking sector has to be ring-fenced for depositors and made 100 percent safe. They shouldn’t use that to speculate - as is happening at present.

On the risks of a ‘Lehman Brothers’ event

There is, for sure. In 2008, the financial sector went bust. In the future, the governments will go bust.

However, Asian governments’ finances are in a much better position than those of governments in the Western world, which have - aside from the published fiscal deficits, unfunded liabilities that are coming due. That will become a huge problem as the population is ageing, and fewer workers support more retirees.

Asia reacted well to the 1997-98 crisis. A period of deleveraging followed: businessmen became conservative, they paid down debt. And banks became cautious in their lending. Asian banks are any day safer than banks in the Western world. I would deposit money in a Thai bank, no problem. They don’t know what a derivative is - because the derivative salesman was stuck in traffic in Bangkok!

On his recommendation for asset allocation

Nobody knows what the world will look like in 10 years. I’m always asked ‘where will the markets go?’ But there’s so much intervention through monetary and fiscal policies that it’s hard to say. My advice is for investors to be diversified: 25 percent in Asian real estate; 25 percent in equities; 25 percent in cash; and 25 percent in gold.

On the risks of a credit bubble going bust in China

Don’t forget the Chinese invented paper; they are very good at printing money as well. (Economist and commentator) Paul Krugman argues that the overall level of debt doesn’t matter because one man’s debt is another man’s asset. But the problem arises when one man’s debt cannot be repaid. That is going to happen in China because the underground lending market is larger than people perceive. That is a potential problem.

In China, for sure you will see a setback: in fact, it’s already started. Small companies are finding it difficult to get credit, and in the underground market, the lending rates are over 60 percent. That tells you something. The price of copper too is telling you something is not right…

The problem is that the local Chinese are selling and buying properties in Vancouver and in Singapore. They are shifting money outside. So, the insiders are selling and the stupid foreigners have been buying Chinese shares.

It’s very difficult to measure GDP growth in China. We essentially add up goods and services and we calculate an inflation indicator - say, the CPI. The nominal growth less the CPI gives you the real growth. But it’s not only in America that leaders are lying about the true cost of living increases. In China, the rate of cost increases is of the order of 10 to 15 percent a year. Pork prices have doubled over the past 12 months; rice prices are up; energy prices are up. I believe that China’s GDP figures are overstated.