Investment Guru Marc Faber expects most markets, including India, to see a 30% correction, which is likely in, both, equities and commodities.
He adds that the commodities complex is still attractive from the long-term view. Faber feels that industrial commodities may not make fresh highs in the near-term.
Faber believes that not much has changed but the markets became over-extended in the last ten days with some industrial commodities going up vertically. So the market was terribly overbought and now we have a setback but that is for the time being.
Excerpts from CNBC-TV18's exclusive interview with Marc Faber:
What are your thoughts on the kind of meltdown that has happened in the commodity space and what has brought it about?
Basically not much has changed but the markets became over-extended in the last ten days with some industrial commodities going up vertically. So the market was terribly overbought and now we have a setback but that is for the time being.
Most asset markets have kind of reached the peak and I would stay aside from the market because one never knows if this is just a correction in the last ten days or is it the beginning of something more serious.
I'm not sure but looking at the shape of the market we could have most markets including India headed for something like a 30% correction.
When would you like to take that call on commodity markets? When would you decide that it is not just a technical correction that we saw yesterday but also something more serious? What signals you would be looking for?
In principle, the commodity complex is still from a longer-term perspective, attractive because we had a bear market from 1980 to 2000 and then the bull market started in 2001 and now we are in 2006.
So the bull market is five years old and the upward or the downward phase in commodity prices lasted for about 22 to 30 years. In other words, from peak to peak or soft to soft, the commodity cycle lasts for 45 to 60 years. So I think we still have some room to run.
Having said that, if one looks at the last bull market in commodities from 1970-1980; then in 1973, sugar, wheat and corn peaked and thereafter they never hit a new high.
So one can have in commodity markets, like in stock markets, different groups peaking out at different times. And it would not surprise me if some industrial commodities have not made a major high and may not make a new high in the near future or ever again in this cycle.
Across assets classes though it's been a secular run whether it is equity, commodities or even real estate. Do you think it is going to be a case of who blinks first or will weakness in one asset class lead to weakness across the others?
That is a good point because in every asset class, we have genuine buyers. If someone says I want to own India and I am prepared to ride out the fluctuations in the Indian market if it goes down 30%, then I would be prepared to buy more because I believe in the fundamental story of India.
But at the same time we have hedge funds, a trillion dollar in the world that are leveraged. So if we are conservative, we are talking about a leverage of 2:1 or 3:1, so it is $2:3 trillion that's splashing around the world.
In addition to that, we have hedge funds similarly hazier because whether it is a Goldman Sachs or a Morgan Stanley, they are essentially paid on performance of traders.
So they behave like hedge funds; they go long in markets that have strong upward momentum and then they go short when the markets turn down. We can have big fluctuations on a given day and what we had in the last two years is unusually low volatility, which usually gives way to much higher volatility.
You said you see a 30% correction in markets including India. Is that across classes or is it only the equity markets that you see this correction in?
This correction is expected mostly in equities and commodities and I have to say 30% correction is nothing in a lifetime. If someone cannot take a 30% correction, he should not touch anything at all, 30% is a norm of movement in individual stocks in market trend.
When you say 30%, what period of time do you see this correction coming in?
In the Middle-East the markets were very overbought and the Middle-East is an interesting example because oil prices are still near a record, so one cannot say that liquidity has contracted and yet most Middle-Eastern stock markets are down between 30-50% from their peak.
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