The future is Eastern Europe’s (too) – interview with Marc Faber (part 2)

Our interviewee’s opinion is positive on the capital markets of our region; he thinks that these stock market prices – including Budapest Stock Exchange – are going to rise. His personal experiences are supporting this; leading Asian capitalists and local multinational corporations are turning away from American markets, and starting to prefer the less expensive euro and the relatively cheaper European shares. Meanwhile, everyone knows that Central and Eastern Europe are under-priced, in other words, they are very cheap.
Marc Faber’s opinion is less optimistic on the policies of the central banks of the world; due to them, more uncertainties are going to appear in the world economy. This is why he still recommends keeping and buying gold and shares of oil companies. He thinks that oil prices can go even lower; however, after that, he expects a serious upward price adjustment. He also believes that the accelerating flow of capital from America to Europe will eventually increase the exchange rate of the euro against the dollar. Currently, this cannot happen, because major investors have ‘over-shorted’ the euro.

Are you sure about that American indices are going to drop within the next half or one year?
I did not say that. I am only pointing out that the American bull market has been active since 2009 – which is a world record since the end of the World War; and a record within the record is that there has not been a downward price adjustment over 11 percent since October 2011. In other words, almost for four straight years the prices of Dow Jones and S&P 500 have been increasing steadily. There is no way that it goes on without a change, without the ‘bear’ market returning. Of course, I do not know whether it happens in the next half year or only next year, but I do know that it will certainly happen. I would also like to my express my reluctance about the American market, which is, to my opinion, is overpriced, save for the shares of some mining companies. In fact, I believe that the prices of some oil company shares are going to increase by even 10-20 percent.

Speaking of oil prices: not too long ago, you said you saw a potential in the Russian market. Did you buy Russian assets; do you still recommend them?
Actually, I have not really recommended Russian assets. I can only answer whether I find Russian shares cheap – and my answer is positive indeed.
As for the state of Russian geopolitical, economic, and capital markets, I think, it is going to change soon. I think the apparent opposition will eventually cease; the West will accept that Russia will never give up Crimea which was taken by military force. This acceptance in itself will bring easing.
Furthermore, it must be kept in mind that Europeans do not find Russian politics disagreeable.  If Europe finds the politics of someone disagreeable, it is not Russia, but rather the United States. They see them and not Russia as a force always aggressively intervening in world issues. People simply do not think that Russia would annex the Baltic states too and take other aggressive actions. They only want Crimea, and slowly everyone will accept its annexation. Sanctions will disappear and then everything will be back to as it was in Russia.

But falling oil prices cause losses for Russia…
Oil prices have been extremely fluctuant since 1999. Experts, who predicted a 150-200 dollars price a barrel at the beginning of last year, are now forecasting a drop to twenty dollars. I do not entirely rule out this possibility. The real question is whether the price stays there, which I highly doubt. On the world market, a realistic price for barrel would be 40-60 dollars. Based on this belief, I think that share prices of many oil companies will rise by 10-20 percent.

What is your opinion on gold?
I have been recommending buying gold since the middle of the nineties. My reason has always been that central banks are not to be trusted. People have to take charge of their own financial lives, they should be their own central bankers – and just like a central bank, a small investor should own gold. I still strongly believe that gold – in its very physical form – is a value which provides safety, in case of the partial or total collapse of the financial system. In the light of what central banks do these days, flooding the world with almost free money, there is a realistic chance of a collapse. We must see that central banks do not generate predictability but uncertainty this way. Consequently, it is better to have some gold; however, I would not recommend investing all your money in gold, since gold is rather selfish. By buying and owning it, cash flow is not generated, and the economy is not growing.

Do you think that the Central European area is a good investment possibility – for instance Hungarian market?
There was a time, when your region used to be overvalued. However, lately, it is the complete opposite – it became too cheap. I know that international investors are interested in East-Central Europe. I am not saying that suddenly there is going to be a significant rise in prices on your stock markets, but I am certain that this process is about to start. Of course, it is connected with the global money abundance; investors are looking for even cheaper markets and corporations. I personally know that there are some companies in that region which are doing an excellent job, and still selling on low valuation.

Could you give an example?
I do not analyse Central Eastern European corporations. I live in Asia, I know this area better, and I am looking for businesses here. If I lived in Europe now, in the West, certainly, I would see the greatest potential in Central Eastern Europe: Slovenia, Serbia, Hungary, and Poland. It is seen here as well; Asian international companies and multinational corporations are turning towards Europe. They are leaving behind America, taking their money from there to Europe and Eastern Europe. Just like them, Western European and American investors are moving to Eastern and Central Europe – they are beginning to explore investment opportunities. I think it is reasonable to expect a stack exchange boom in that area.

How worse do you think the position of the euro is going to be against the dollar?
The short positions against the euro are extremely large; the majority is interested in the weakening of the euro. Actually, the international investor community belongs to this group. Of course, everyone knows that the dollar is not as much better as currency movements suggest. Furthermore, while the countries of the euro-zone have fixed the balance of payments, in the United States it is still extremely loss-making. Something else that I experience: Chinese investors and Asian multinational corporations in general, are fleeing from the American market, switching from dollar to euro denominated assets. Because European markets certainly are cheaper than Americans, and the euro is cheaper than the dollar.
This ‘escape’ of capital from America is going to speed up if the dollar keeps getting stronger or if the American economy weakens significantly. This has two consequences: firstly, there is going to be a major price rise on European stock markets; secondly, Fed, referring to the significantly weakening dollar, initiates another – the fifth – qualitative easing, which floods the American economy with free money, weakening the dollar even further in the process.