Marc Faber Dec-19-2003
Investment Guru
Personally, I would now focus on real estate in India, because what has happened in the business cycle is, upmove in first, and in secondary business cycle you get inflationary real estate pressures.
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It's time to take a fresh look and shift focus to oil, fertilisers, and real estate, says Contrarian investor Marc Faber. Last year, Faber had strongly advocated the commodities sector, but now he feels that the stocks have run up substantially and may correct soon.
Faber sees oil prices rising from the current levels, and the move will benefit refining services companies, he said. Also, real estate in india is expected to benefit as the penetration of housing in India is very low.
Faber also holds the view that China may slow down in the near future. He says there are signs of inventory accumulation in that country, even as prices are rising.
The following is the full text of CNBC-TV18's conversation with Marc Faber.
Q: Have you tempered your optimism on the commodity cycle? If so, why? Are you more cautious now?
A: The thing is that I have started to recommend to overweight commodities and resource talked about 18 months ago to two years ago. I have expanded on it in my book, which was published more than a year ago and theory was that the incremental demand from China, as China was industrialising, would create a price increases for most commodities since China is an net importer of just about every commodity. And over the last 18 months the scene of rapid industrialisation not only in China but also in India, Vietnam and in other countries, that has created this incremental demand for commodities, has become a very well recognised theme and today when I travel around the world everybody talks about China and companies that benefit from China. I think these companies are located in Argentina, Brazil or Australia or Malaysia or Indonesia. I think theme has now become extremely popular and as a contrarian Investor, I always look for undiscovered sectors of the market, of the investment universe. So I am a little bit cautious about commodities, and not as cheap as they were. They are overbought and should correct one of these days. There is an exception to that. I still like oil. And I think oil at this level is relatively inexpensive considering the potential demand that will develop in Asia over the next 6-10 years and also the incremental demand for oil in the Middle East and economies themselves.
I think that the oil price may rise and since oil-servicing stock have grossly under performed the market over the last couple of years, I think that they may move up now.
Q: Indian stock have been going up in the hope that Chinese demand will fuel prices further from these levels, specifically steel and aluminium. Do you see prices having run-up ahead of those expectations? What is your call on these two?
A: In principle.. long-term they should be ok but I think that China will slowdown, if not now and in six months but then with more problems. The Chinese economy shows clear signs of it overheating and there also has been some inventory accumulation. Don't think that the Chinese don't speculate in these commodities when prices move up they accumulate inventories and they purchase their future contract. If I am right and capital spending in China does not grow by as much as it is expected and if industrial production instead of growing at approximately 20% p.a., as it was, slows down to a growth rate of say.. 5-12% p.a. then I think we'll get some profit taking in commodities.
The long-term theory I have in commodities is, that they bottomed out in the period 1999 to 2001 and that way at the beginning of a secular bull market in commodity. In other words they will go up for the next 10-12 years. But still you can have within a rising trend, very serious corrections such as? you take the crash in 1987, it was in the context of a major bull market in equity, but nevertheless the stocks market dropped by 20% in one day. So I think that commodities at this level would come in for some profit taking.
Q: Have you taken into account the similar demand coming from India as it came in China for these commodities?
A: It is clear that China produces more steel than the US and Japan combined and is still importing steel. If you have very high capital expenditures especially in infrastructure expenditure, the demand for steel is very high. Also by the way for cement in the case of China, we have cement production and demand that is five times higher than in the United States. So if you compare that to the Indian steel production and Indian cement production and you assume that the Indian economy will also, for a change, put some decent infrastructure in place. And obviously in India you will have a strong incremental demand for construction material, for steel and for cement.
Q: You have seen that the rise coming in the Indian stock markets, what is your call? Is there a big upside to India even now?
A: Well.. in near term, you see 2003 was an unusual year in the sense that everything rallied except of course the US dollar but that aside, commodities went up, bond prices went up especially corporate bond prices, equities went up, oil prices went up, real estate price went up. There is nothing that went down.
I think that 2004 will see some sectors of the market still developing, like I said oil, oil servicing, possibly basic stocks. I also think that the selected commodities such as coffee, orange juice and sugar have good upside potential. Whereas the metal, as I mentioned industrial commodities are probably played out to a large extent. So I also think that in India, the expectations have been very high. And India is now being discovered by the international investment community. So I am a little bit more cautious about India. I am the chairman of the fund?and it is up more than 100% this year and I think that we will not repeat this kind of performance next year.
Q: We don't have great representation in India, coffee, orange juice, sugar. If you are looking at India, what do you think will be the relative out-performers in 2004?
A: I think that the oil sector will probably do quite well. Fertilizer companies will do quite well. I think that the fertilizer will be in short supply throughout the world. Personally I would now focus on real estate in India, because what has happened in the business cycle is, upmove in first, and in secondary business cycle you get inflationary real estate pressures...you compare housing developments in India to say other emerging economies, then it is still way behind in India and the home ownership rate is still relatively low. The pace for capital of residential homes is very small. So I think that real estate would be a sector that I would focus upon.
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