Investment guru Marc Faber is known as Dr Doom for his tendency to be ultra-bearish about everything. But he is bullish about China's stock market.
“I don’t think it will make new lows,” Faber said, referring to China’s benchmark index. The CSI300 index declined to 3,205 on August 26, 44% below it's June 8 high of 5,353.7.
Faber's argument that the CSI300 would resume its climb is based on a belief that China's notoriously fickle retail investors will return to the market given momentum behind the rally leading up to the peak in June.
China's last equity rally saw the CSI300 climb 388% from 1,465.5 points at the end of October 2006 to 5,688.5 a year later, before sinking 71% to 1,633.7 at the end of October 2008. Retail investor interest became muted atfer that spike amid the global financial crisis.
Faber compared China’s stock markets to the S&P500 in 1982, which climbed rapidly on large volumes, corrected and then resumed its ascent. The S&P500 ended 1981 at 122.6, declined 10.6% to 109.6 by the end of June before surging 28.3% to 140.6 by year-end.
He said that any view on China's stock market depended on whether Beijing allows the renminbi to weaken. He believes authorities can maintain a strong currency if they want to, but noted allowing the RMB to weaken would help domestic liquidity conditions. This, in turn, would support the equity market.
Faber predictably railed against central banks. It followed specific comment about currency depreciation policies being enacted by the Bank of Japan and European Central Bank.
His argument was that countries traditionally devalue their currencies because they have a trade and current account deficit.
"Trade and current account deficits are symptoms of over-consumption. The currency goes down and the consequence is people consume less. Everyone says they have to depreciate so exports can pick up, but exports to whom? The customers are dead or about to go dead. I really think that these central bank policies are a living disaster."
Broker CLSA's 2008 investors' forum saw Faber blame the financial crisis
on the US Federal Reserve for waiting until three years into an economic expansion before raising rates.
The audience at this year's investors' forum heard Faber praise Fed chair Janet Yellen for not raising interest rates on September 17. “For once Ms Yellen took the right decision – just for once, by accident probably,” said Faber.
The investment guru saw Asia’s growth story shifting from a slowing China to India and Indochina, but doubted that 7% growth in these jurisdictions was sufficient to support a global economy that he sees heading towards stagnation or contraction.
“People have written off emerging economies and are far too optimistic about the US,” he said.
Still, Faber forecast that emerging markets had further to fall because global liquidity growth was now at the most negative it has been for 20 years. “Unless you have a strong rebound in commodity prices, it [global liquidity] is not going to turn up,” he concluded.