Faber bullish on Indian realty sector

Investment guru Marc Faber expects money flow into India will continue. He added the appreciation of the rupee has helped foreign investors in India.

Faber would not focus on indices and would look at individual stocks.

According to Faber, real estate companies are on the high side. There is a beginning of major real estate development cycle and it could last 20-30 years. He added the Indian realty prices are still very reasonable in comparison to the rest of the world. He would rather invest in Indian real estate.

He added there has been strong bull market since 2003 in India. The indices are higher than it was during 2006 and majority stocks are down. Funds are no higher than May 2006, he added. Most funds put underweight on Asia.

The second half of 2007 is not likely to be favourable for equities. He expects that US Fed would likely to cut interest rates in H2CY07.

Global liquidity tightness is unlikely originate in the US. Interest rates in the US would climb higher than the market estimates, he added.

Excerpts from CNBC-TV18's exclusive interview with Marc Faber:

Q: How are you feeling about emerging markets now because most of the markets are at new highs? Has the sustainability or the sustained strength come as a bit of surprise?
A: We had a very strong bull market since 2002; here in India we had it since 2003. Then in some markets we made highs last May and had a serious correction here in India. After that we recovered again and had a high during last February; since March 13 we again moved into a correction. The markets have been relatively soft. But the key is to understand that the market consists of many different shares.
If you take as an example of the Indian markets, the indices are higher today than they were in May 2006. But the majority of stocks are actually down from May 2006. The performance for foreigners is of course helped by the appreciation of the Indian rupee versus the US dollar. By and large since I am the Chairman of a variety of funds here in India, most of the funds I look at are actually no higher than they were a year ago in 2006.
Q: What is your call then on the market from here because we have just made a new high a couple of days back? Do you see substantially higher levels in India from hereon?
A: Well anything can happen. In India, I would not focus too much on the indices but would actually focus on individual stocks. The indices have been driven by a few large cap stocks. It is the same in the US markets where some stocks are still moving up. But in case of the brokers and the banks, they are all lower than they were in February or a couple of months ago.
With the exception of Goldman Sachs, that made a new high just three weeks ago, all the other brokers did not exceed the February highs. So, I think we have to focus here very much on individual shares and global liquidity.
I think from the US, you do not get tight money from the Federal Reserve, as it is run by a very dovish person Bernanke. We have some illiquidity in the household sector and now some illiquidity is happening in the capital markets through the sub-prime lending mess; there are already 50 sub-prime lenders that have been forced to the wall. But I do not think that the second half of this year will be favourable for equities.
Q: What do you expect to see for money flows into India in specific because we have got quite a gush up until now both in the primary and secondary market?
A: Well, I still think that by and large the world is underweight on Asian stocks.
We have a lot of liquidities at the hands of the central banks and well-to-do individuals worldwide; their investments in India and other Asian countries are relatively small. So, I expect actually money will continue to flow into India. Of course the question is what the supply is going to be for securities and what is global liquidity going to be? Because, if you have an S&P that goes down in the US at some point or you have a dollar crisis or anything, then obviously these money flows can be interrupted at least temporarily.
Q: I believe you do like the real estate story in India though. What have you made, if you have had a look at today’s new listing - DLF? How do you find the listed real estate stocks at this point?
A: Well, I am not interested in real estate listed companies in India because I think they are on the high side. But I think for the individual investor, there is still plenty of opportunity in realty in India per se because we are at the beginning of a major realty development cycle that could last 20-30 years.
If you compare the realty prices, by and large the prices in India are reasonable compared to the prices in the Western world; I am not talking about Mumbai's prime location.
Q: The big concern for the emerging market investors came in a month back when the US bonds yield crossed 5% and went to 5.3%. Subsequently, it has cool down back to around 5%. Do you think it has topped out for the moment or this is just a pullback and bond yields will harden more out there?
A: We had bulls in the bond market in the US which began in September 1981 and worldwide it ended in June 2003 when the Japanese Government Bonds, or JGBs, were yielding less than half a percent and the 10 years in the US was yielding 3.3%.
I expect over the next 20 years interest rates in the US will go much higher than it is perceived by the market place as I think inflation in the US will accelerate on the upside partly because of the rise in the prices of commodity, energy and food. This is also partly because of the weakness in the dollar that will eventually lift import prices.
Therefore, I would be negative about bonds. But the bonds market will not collapse in one go simply because the economy in the US is in my opinion much weaker than what the statistics show. The statistics show during the first quarter the economy grew in real terms by something like 1%. I think we are already in stagflation because the government in the US probably does not measure inflation properly.
So, if you have to say a growth of 5% in the economy and instead of taking your consumer price increase at 3%, then you got 2% real growth. If you take inflation at 5% or 6% then you actually have nominal GDP growing up by 5%. Then the real GDP is contracting by 1%. I think this is happening in the US and during the second half of the year Bernanke will again cut interest rates.

Q: So far the global markets have been extremely resilient. What do you think could be the trigger for an eventual correction because we have not had any meaningful corrections over the last three-four months?
A: Yes that is correct. And, I would also like to make an additional comment about resilience. If you look at the US markets, say since 2000, first of all in euro terms we are way down over the 2,000 levels. So, we never recovered back to 2,000 high. If you look at the US markets since February, the indices have made a new high in dollar terms. But in euro terms, we are exactly at the same level in February. So, I am not so sure that the US market has been that strong.
If you talk about the stock markets of India, Brazil, Argentina or Russia since 2000, yes we have been very strong. We are up several fold and so forth. And, I think your point about the correction is absolutely correct. We have not had a 10% correction in the US since March 2003; one correction will come at some point and I think that will be more than 10%.
There are two points I would like to make about the Indian stock market. First of all, a couple of days ago the technical picture would have favoured a breakout of the market on the upside. But when you have a technical constellation, that would favour an upside breakout and does not materialise, then the downside could be quite sharp. So, we have to watch in the next few days.
Secondly, Samsel sold his real estate investment trust off in February this year. That was the peak of the REITs in the US and since then they have been going down. Blackstone just went public the other day and the stock on the first day jumped to a premium. But today it is lower than the issue price.
Now in India, you have DLF which is going public today. I think it will be a case where at the beginning the promoters have the vision and the investors have the money; later it would be public have the vision and the promoters have the money. And, usually these great issues are a negative side for the sector and the entire market.
Q: Are you saying that you are not very impressed with the kind of paper India has been churning out these past few weeks?
A: We have two counter-trends in the world. We have private equity and individual selling equities, which we have essentially in the US. The private equity now in other words are the LBOs, or Leveraged Buyouts, as we have had since the 1980s. They are running at the rate of over 5% of market capitalisation in the US.
Equity supply contracts are also the same where we have equity buybacks by corporations. But believe me every private equity firm buys equities and then they repackage and resell them into the market at some point.
I believe some tax changes in the US will make private equity far less attractive. If you want private equity, I would say you should look at some Asian countries. In fact, a large LBO funds should take over the whole island of Taiwan and sell it to the Chinese because the Taiwanese shares are selling at a very low PE and the Chinese shares are selling at something like 40 times of the earnings. So, you could make a great arbitrage.
Q: If you had money to invest in India and had to split it between realty, equity and art, how much would you give to each category?
A: Well, personally I would actually spend all my time on realty in India because I think that is a no-brainer in the long run. It is a problem for people who will have very high borrowings, against their realty because of interest rates. Realty has always been a cyclical industry, where prices move up or down. But by and large if I look at the world, the reason so many families are rich, that came out of realty, is that the money was tied up in realty. They did not do anything more stupid with their money like buying Internet stocks in 2000 and then losing 90% of their money as prices went down.
So, my advice essentially for people, if you are not an expert in financial matters, to own realty - a safer avenue to wealth.