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"What China did to America, India could do to the services sector of US & Western European countries..." - Views on News from Equitymaster
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  • Sep 25, 2003

    "What China did to America, India could do to the services sector of US & Western European countries..."

    Dr. Marc Faber was born in Zurich, Switzerland. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics. In June 1990, he set up his own business, Marc Faber Limited, which acts as an investment advisor, fund manager and broker/dealer. Dr. Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report, which highlights unusual investment opportunities. He is also associated with a variety of funds.

    He is the author of the book "The Great Money Illusion – The Confusion of the Confusions" which was on the best-seller list for several weeks in 1988. His latest book is “Tomorrow’s Gold”, which sets out to find tomorrow’s gold – the outperforming asset class of the future. His website is www.gloomboomdoom.com

    In an interview with Equitymaster, Dr. Marc Faber shared his views on the Asian and Indian economies in detail with respect to global economic performance.

    EQTM: The global economy seems to be at the crossroads. The US economy is giving mixed signals. Europe continues to grapple with issues relating to the single currency. Japan, on the other hand, has turned in some good numbers, but here too some doubts are being cast. With the ‘three engines’ in the state in which they are, where do you see global economy headed?

    Dr. Faber: In general, we have to distinguish different regions, as the US will hardly have a strong recovery because of the leverage the consumer finds himself in and also interest rates will not go any lower. Rather, we will see a back up in interest rates, which will be damaging to the refinancing boom in the housing market. Therefore, consumption will eventually disappoint and the US will again go into recession by the end of this year or sometime next year or even possibly in 2005. I just do not see US being the growth engine for the world in the next few years.

    Japan, along with Asia, will perform reasonably well because the Asian region (including Japan) has a 50% higher industrial output than the US. So in Asia, there could be essentially a surprise on the upside. Exports to the US may disappoint. But the Chinese economy remains relatively strong, though growth may slowdown in next year. Industrial production in China grew by 20% in this year, which could go down to +5% next year. We also have economies like Vietnam and India, which look actually quite attractive. So overall, the US will disappoint and Asia will probably do quite well including Japan.

    EQTM: Coming to India, what do you think of India in the global perspective given the fact that we are a relatively small economy with a GDP of over US$ 500 bn. There are lot of talks with regard to developments taking place in the economy with emerging opportunities from BPO, outsourcing of manufacturing, pharma and software. What do you think of India going forward as an economy?

    Dr. Faber: I think, in general, India is a larger economy than US$ 500 bn because we are dealing with a much lower price level when compared to the US economy. So, if we adjust the GDP for purchasing power, I think that we would have an Indian economy that is may be 20%-25% of the US economy and not as small as US$ 500 bn compared to US$ 11 trillion in the US. Moreover, in India, we have number of sectors in the economy that do not go into GDP figures such as the agricultural sector where you have housewives providing services for the household which do not go into the GDP figures. Whereas in the US, as housewives went to work into the labour force, a lot of their duties have been outsourced to laundry shops and fast food stores and so on and so forth. So, GDP in the US may be artificially high and in India, China and Vietnam, it may be artificially low.

    In addition to that, I suppose that certain markets in India are about as large as US, in the same way as in China where some sectors of the economy are larger than in the US like the steel and motorcycle industry. I think that is important to understand.

    Secondly, India could surprise on the upside. First of all, they are in some attractive sectors going forward for the next ten years. The way Japan in 1960s and 1970s and later on South Korea and in the last ten years, China, eroded the manufacturing base of the US, I think the next big thing to happen in the world is that as a result of new technologies like data transmission, internet and support you have now, essential services that are tradable in the sense could now be outsourced. This trend towards outsourcing of tradable services will grow very dramatically. So, what China did to America, India could do the same to services sector of Western European countries and also to the US. In general, combined with the IT services in India, the pharmaceutical companies could also become very competitive and they are already very competitive in some cases. They could do quite well.

    Now, they may not help the entire Indian economy because the economy itself is very large. I think to really get the Indian economy moving, the government will have to step aside from the market mechanism and release the economy into functioning according to the principles of the markets and not constantly intervene with regulations that do not work in today’s modern world. In fact, I will say, for me, the surprising thing is that India has done so well despite its government.

    I think in India, everything should be privatized. The airports should be privatized because they are a disaster. Lots of services should be privatized that are not provided by the government.

    EQTM: Coming to the stock markets now, what is your view on the global markets? We have seen a sharply rally in the last six to eight months globally including India…

    Dr. Faber: Well again, I do not think one can say what you think about the markets because there are many different markets. Something will go up and something will go down. In general, I think in the US and in Western Europe, we had this huge bull market between 1982 and somewhere between 1998 and 2003 with different sectors of the market peaking at different times. First, the multinationals in 1998, the TMT sector in 2000 and more recently, financial stocks and housing shares, which will go down from here onwards or will move sideways. Whereas in Asia, as you know, we had this colossal decline in 1997-98 and since then, the markets have kind of held at the bottom and are poised to probably go up in the next five years quite significantly. So I would be essentially short in the US and long on Asia. We will also have favorable stock markets in Japan in the next two years.

    Having said that, the markets right now are vulnerable because the US is vulnerable to a significant correction or possibly even a crash. Everybody is unbelievably bullish in the United States and therefore, the markets are vulnerable to any disappointments. So, in the near term, I would be cautious, as the markets will correct between now and say November. Thereafter, the Asian markets will again rise for the next five years, including India whereas the US will rather disappoint investors.

    EQTM: Looking at India specifically, how would you view India as an opportunity for investing in stock markets? What are the sectors that you are looking at?

    Dr. Faber: Well, I mean, we have to make one thing very clear. Individual investors, I mean foreign individual investors have great difficulties in buying Indian shares, unless they buy ADRs. We can invest only through funds, practically. So, I think government should again facilitate the purchase of individual shares by individuals around the world rather than force individuals to invest through funds into India. I frankly, do not understand the rationale and reason for having a government prohibiting foreign investors that come to invest in your country from not coming in.

    I also do not understand why it is difficult to get visa to come to India. I mean India has a great potential as a tourist destination. But the government makes it just very difficult for people to obtain a visa. I am the chairman of three India Funds. We invest money in your country. But even I have difficulties sometimes in getting a visa. For me, it is incomprehensible that the government can shoot itself into the foot the way Indian government does it.

    EQTM: One question we must ask is your view towards the Indian IT sector, given the kind of growth it has seen. Valuations have been very volatile over the last few years. What do you see the future of the Indian IT sector?

    Dr. Faber: Well, I think I am not very optimistic about investing in high tech because we had a bubble in 2000. Once the bubble burst, usually there is a change in leadership in the markets. So, the new leaders will be different stocks than the IT sector.

    Having said that, if someone has a diversified portfolio and wants to invest in IT services, I would rather buy IT services in India than in the US and Europe because IT services in India will be more competitive in the long run.

    EQTM: You spoke of leaders after the crash. Who do you think will lead the Indian stock market going forward?

    Dr. Faber: I think future leaders are resource-based companies like steel, oil and mining. Any company that has a large asset base because we are moving from a trend of lower interest rates which lasted between 1981 and this summer 2003 to higher commodity prices and higher interest rates and higher inflation. And therefore, companies that have large assets would be beneficiaries. In India, unlike the US, financial stocks may perform reasonably well. In the US, financial stocks are to be shorted whereas in Asia, financial stocks probably still have some more room to move on the upside.

    EQTM: One very important question from the retail investor perspective in India, where most of us look at shares and may be, bonds. What are the other investment opportunities that you would recommend that investors consider?

    Dr. Faber: People should realize that there are times when commodities perform well, there are occasions when other investment avenues like stocks/bonds/real estate/art perform well. Investors should keep an open mind. In addition to that, the investor has to realize that real estate prices could come down. But if one owns the right real estate in the right location, even in the down market, that piece of real estate can appreciate. Therefore, there are many factors that individuals should consider and have an open mind. Going forward, in general, I think people should not own bonds. They should be in assets i.e. real estates and or in equities that have a large asset base. As I mentioned, I would be long on commodities, including gold and silver.

    EQTM: How do you go about selecting stocks for investment? Though parameters vary sector to sector, but broadly, what are the parameters that you look at before investing in a stock?

    Dr. Faber: I do not really know to really value companies because how do you value say, Internet stocks. It is very difficult. I look at assets that are relatively inexpensive. For instance, I can see that at times, equities are expensive compared to say, commodities. Or at times, commodities are expensive relatively to real estate and so on so forth.

    So, if I look at the real estate market all over the world and I see that in London, rentals or occupation costs are certain times higher than in say, Bangkok, the capital of Thailand. Then, I think Bangkok is relatively inexpensive because after all, it is also a capital of country with 70 m people. It may stay inexpensive and London may remain expensive. But on a relative basis, I can see that there is some value there because it may sell below the replacement cost. Replacement cost would be important criteria, but not the only one though. Dividend yields will also be important criteria for me to look at. Price to sales and debt level of companies would be something to consider. But I do not have an absolute model on how to value a company.

    The valuation of a company can fluke to say, 5 times earnings when people have a negative perception of the company and can fluke to 50 times earnings when they are positive. So, how do you take that psychological element into consideration? I look very much at sentiment.

    When people are very optimistic about a sector or a company, I would be cautious because that means that people have already bought the stock. Whereas, when the whole world is pessimistic about the sector, it means that there is no interest. People may have already sold it and certainly they are not buying either. And therefore, it interests me because if everybody is pessimistic about the sector or a company or an economy, it means that valuations are low by definition.

    EQTM: What are your favourite books?

    Dr. Faber: I have many favorite books. It will be immodest to say that my favorite book is the one that I wrote. I think, for people involved in the share market, I think the great book is ‘Maniacs, panics and crashes’ by Professor Kindelberger. In that book, there are lot of very interesting stuff that he puts together and it is easy to read for an individual.

    I think ‘The Alchemist’ by Paul Coelho, a Brazilian novelist, is also a great book. It shows that if you want to obtain your pot of gold, you have to endure lots of hardship and investors should be aware of that. I think there are other very good investment books, which I have actually on my website the favorite books.

    EQTM: Who are the people that you admire the most?

    Dr. Faber: Well, I think, people who have put their self-interest in the background and pursued the goal. I mean, Mahatma Gandhi, was a certainly an individual of a great stature. As in Nelson Mandela is an individual to be admired for his tenacity and endurance. And I also admire religious leaders like Jesus, Mohammad and Buddha.

    In principle, I am a Christian. But I have an affinity to the teachings of Buddha because I think he taught extreme tolerance. In other words, he did not teach that you have to pray to someone for your daily bread. You have to work on yourselves and I think it is a very important thing in life to realize for people that you should first look at your own mistakes and try to work on yourselves before playing it on other people.



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