Overvalued Markets (March 2020) - Top 10 Countries

Last week we wrote about the top 10 undervalued stock markets using data from StarCapital AG. Data is up-to-date as of February 28th, 2020, and markets went through interesting gyrations in the last two weeks, to say the least.

But let's go ahead anyway with a list of the top 10 overvalued markets based on metrics such as CAPE (Cost Adjusted Price Earning Ratio), average dividend yield, price-to-book ratio, and price-to-sales-ratio.

Here's the list of the top ten most undervalued markets as of March 2020.

Indonesia was the most expensive at the time, followed by the United States, India, New Zealand, Denmark, as well as Australia, Brazil, the Netherlands, Belgium, South Africa, and Switzerland. Most have experienced a sharp 20 to 30% drop in the last two weeks, Let's have a look at the 10-year charts of the largest markets, namely the United States, India, and Australia, using Trading Economics as the source.

The S&P 500 has a CAPE of around 28 before the drop. It went down as low as 2,400 points this week but ended the week at 2,711 points. Even with the drop of around 20%, the CAPE is still well over 20 historically speaking is considering to be overvalued for the US market. To get into undervalued territories, we'd have to go with a CAPE of under 10 which means the S&P 500 under 1,000 points at current levels. Note earnings are likely to sharply drop in the next quarters due to the reaction to the coronavirus outbreak.

 Another way to look at the long term valuation of the stock market is to check the valuation against the GDP. The Whilshire 5000 to GDP ratio (source: longtermtrends) is around 1.2 right now well above the historical average of ~0.8. If we ever went back to the ratio reached in 2009, the S&P 500 would be around 1,200 points.

Moving to India's stock market with the 10-year chart of the SENSEX shows the recent drop in perspective with the market still doubling since the lows in 2012. If we look at the 2008 lows when the SENSEX was at around 9,000 it nearly quadrupled in 12 years. If earnings grow at that pace that's not an issue, but the rise was also due to an expansion to the price-earning ratio which led to the overvaluation of the market.

The Australia S&P/ASX 200 stock market index does not look as extended as the other two. The CAPE was 18.7 at the end of February, and the sharp drop have brought it down just under 15. We don't have historical information about the Australian CAPE, but it's clearly not in undervaluation territories. Another measure to look at is the PB (Price-to-Book) ratio which was at 2.0, and undervalued markets are often around or even under 1. 

It normally takes one to two years for a bear market to bring valuations to fair value or undervalued, and Charles Nenner, a market cycles specialist, expects markets to bottom out at the end of 2021. Note that shorting stocks may be very risky due to the central bank involvement in markets (if they print enough, stocks will go higher no matter what), and purchasing bear ETFs often have very high associated costs.

Despite globalization, not all markets move in unison and some of the undervalued markets we pointed out last week start to have interesting valuation although it may pay to be patient. I'd see further weakness in Russia, Singapore, Austria, and South Korea as a potential buying opportunity once the situation with the Coronavirus become a little more clear.

Marc Faber March 2013 Market Commentary

Marc Faber has just published the Gloom Boom Doom market commentary for March 2013 entitled "I do not believe in a deflationary Collapse but I am afraid of it".

After telling investors to relax about short term volatility last month, he explains why he worries about the time when the current asset inflation will give way to a serious asset deflation, which has to happen eventually.

The decline in the gold prices concerns him, as it could mean we are about to enter a period of asset deflation. He stresses 2 points:

• Uncertainty about the asset deflation timing. Most likely, different asset classes will deflate at different times and with different intensity. 
• In a deflationary environment, financial assets (stocks, government and corporate bonds especially high yield bonds) would likely be the most vulnerable assets. That's why he can envision money flowing into a sound currency, and move out of fiat money. This is why he still continues to  recommend the gradual accumulation of physical gold.

This month market commentary comes with one attachement:

• “The Indian Budget & the Broken Window Fallacy” by Shanmuganathan “Shan” Nagasundaram. This report shows well-intentioned government plans may not have been as beneficial as thought, and it my have even hurt the ones it intended to help (poor people).

If you want to access the full Monthly Market Commentary (MMC) by Marc Faber, it is available for 300 USD per year.  

Marc Faber: Global Recession in Q4/2012 Q1/2013

Marc Faber is interviewed on CNBC on the 25th of May 2012.

He explains that the best solution would be for a Greek exit, but what's likely to happen is a softening of the German position and the start of Euro-bonds which would be negative for the Euro. However, currently the Euro and the stock markets are oversold and we should anticipate a counter trend rally.

He also mentioned that as everybody focuses on Europe, the real threat to the economy could be the slowdown in India and China.

Some analysts estimate that a Greek exit could lead to a 50% correction in European stocks, but Marc Faber disagrees and views this as a good outcome likely to be positive for stocks.

He then goes into technical analysis and explains that many stocks are breaking and we should except a significant recession, so significant that he's 100% sure there will be a global recession by Q4 2012/Q1 2014 and recommends to hide in US dollars.

India to Pay For Iranian Oil with Gold

I've just seen a report on Russia Today saying that following sanctions from the US and Europe on financial transactions with Iran, India and Iran had found a compromise and India would now buy Iranian Oil with Gold.

Would that have any significant effect on the Gold market? Let's see the numbers. Russia Today's reporter said that Indian imported 12 billions USD of Iranian oil per year. Gold is now about 1670 USD per ounce. So That would be around 1.2 millions ounces of Gold or 200 metric tonnes of Gold per year. That's a massive amount considering India had 557.7 tonnes of Gold reserves in 2010 (source: Wikipedia). I assume India will not want to see their reserve go down, so they'd have to buy those 200 tonnes on the Gold market. By the way, 200 tonnes would just be the amount purchased by India from the IMF in 2009 (when gold was around 1100 USD). Another way to look at this numbers is to compare it to the SPDR Gold Trust Holdings - the largest manager of Gold-based ETF - that stood at 1,239 tonnes in May 2011. So if India and Iran actually implement this scheme for one or more years, this would be extremely disruptive on the Gold market both by the amount of required physical Gold and the geopolitical implications of such move.

Marc Faber Picks at 2012 Barron's Roundtable

The first month of the year is time for Barron's roudtable. There were 10 panelists for 2012:

• Scoot Black - Delphi Management
• Fred Hickey - The High Street Strategist
• Abby Joseph Cohen - Global Markets Institutes
• Brian Rogers - T. Rowe Price
• Marc Faber - The Gloom, Doom & Boom Report
• Meryl Witmer - Eagle Capital Partners
• Mario Gabelli - Gamco Investors Inc.
• Oscar Schafer - O.S.S. Capital Management
• Bill Gross - Pimco
• Felix Zulauf - Zulauf Asset Management

They discussed their views on the economy and markets and gave their picks for 2012.

Here are Marc Faber's Picks for 2012:

Investment/Ticker	Price 1/6/12
Big-Cap Stocks
Total / TOT	$50.75
Nestlé / NESN.Switzerland	54.00 CHF
Novartis / NVS	$57.31
Pfizer / PFE	21.57
Singapore
SATS / SATS.Singapore	S$2.23
K-REIT Asia Management / KREIT.Singapore	0.89
StarHub / STH.Singapore	2.9
Wing Tai Holdings / WINGT.Singapore	0.99
Fraser & Neave / FNN.Singapore	6.35
Hong Kong
Sun Hung Kai Properties / 16.Hong Kong	HK$98.20
Swire Pacific / 19.Hong Kong	75.45
Hang Seng Bank / 11.Hong Kong	92.9
India
India Capital Fund*	$66.24
Short
International Business Machines / IBM	$182.54
Salesforce.com / CRM	101.06
Australian dollar	A$1=$1.02
*Price of A shares as of 9/30/2011.

Source: Bloomberg

Here's the part of Barron's Roundtable where he explains his long picks:

Faber: My preference is asset diversification, as we don't know how much money governments will print, the size of fiscal deficits and so forth. The biggest uncertainty is what will happen to the Chinese economy. The Chinese probably can continue to muddle through, easing interest rates again to keep things up. But we're dealing with an economy driven by capital spending, which is driven by credit, which wasn't the case until 2008.


Faber: There is a huge amount of underground lending throughout Asia. Mr. Bernanke can drop his dollar bills on the U.S., but the growth in dollars here can lead to strong economic growth and inflation in other countries. That has happened in the past few years. I am the most bearish person you can imagine on earth, which is why I recommend putting, say, 25% of your money in equities, 25% in precious metals, 25% in cash and bonds and 25% in real estate. These assets won't go up substantially this year, but they could preserve your wealth.

People say large-capitalization stocks are inexpensive, and I agree. I would buy a basket of high-quality big-caps in Europe and the U.S. You can by Total [TOT], in France, which yields more than 5%, and Nestlé [NESN.Switzerland] and Novartis [NVS] and Pfizer [PFE]. These stocks don't have huge downside risk. Because emerging markets saw big declines last year, you could also buy SATS [SATS.Singapore], in Singapore, which provides catering services to the airline industry and ports. It yields 5% and trades for 13 times earnings. I also like K-REIT Asia Management [KREIT.Singapore], a real-estate investment trust that yields 7%. The stock has fallen by about 50% and the dividend might be cut. But even if it is cut to 4%, this is an OK investment. These stocks won't go up right away, but reinvesting dividends will yield an adequate return over time. StarHub [STH.Singapore], the mobile-phone company, yields 6.9% and the P/E is 14.

Zulauf: If China decelerates sharply, won't markets like Singapore have another big hit?

Faber: The question is, to what extent has that been discounted already? They could fall another 20%, but a luxury-property developer like Wing Tai Holdings [WINGT.Singapore] already sells for half its book value. I am positive about Singapore in the long run because more Europeans are moving there, and to Hong Kong. Because of banking-secrecy laws it is probably safer to have a bank account in Singapore than Europe.
The Hong Kong market was hit hard, and stocks haven't bottomed yet. But you can buy Sun Hung Kai Properties [16.Hong Kong], with a P/E of five and a yield of 3.5%. Swire Pacific [19.Hong Kong] is a blue-chip, a well-managed conglomerate. It yields almost 5% and the P/E is 11. Hang Seng Bank [11.HK] yields 5.6% and trades for 11 times earnings. There isn't a huge risk in these stocks, but maybe I'm too bullish.

and his short picks:

Faber: IBM [IBM] is a good short. It is the back office of the world. There is room for earnings disappointment. If China implodes, the Australian dollar will go downwhill. That's another short. A third is Salesforce.com [CRM], which I recommended shorting in the June Roundtable ["Buy Low, Stay Nimble," June 13, 2011].


Faber: Order, order. I haven't finished. Fraser & Neave [FNN.Singapore], in Singapore, is a conglomerate similar to Swire. It sells for 10 times earnings and yields about 3%. It could become a takeover target at some point. Lastly, I am the chairman of the India Capital Fund [an open-end fund sold outside the U.S.]. The fund and the Indian currency have been hit hard, and the fund could go lower. But the U.S. outperformed India last year on the order of 40%, and the Indian market looks attractive at 12 times earnings. As Chen Zhao at BCA Research said, in China the macro backdrop is fantastic and the micro is a disaster, but in India the macro is a disaster and the micro is fantastic. India has very good companies. The fund is overweight the banks and has a P/E of 10.
Last year I was overweight the U.S. relative to emerging economies. At what stage will the outperformance of the U.S. cease and emerging markets rise again? It could be three or six months, or a year. I am gradually increasing my exposure to emerging markets. Thai and Indian banks have no exposure to Europe. Indian banks lend domestically.

Why is the Indian economy having trouble?
 
Faber: Money-printing in the U.S. created food and energy inflation. In poor countries the percentage of per capita income spent on food and energy is much higher than in advanced societies.

Faber: Yes. Credit was growing rapidly and the hangover period could last for a while but these markets are good long-term investments. I travel extensively in these countries and you can see the growth of economic development. People go from bicycles to motorcycles, and from motorcycles to cars. First-time buyers of cars jump socially, as do first-time buyers of homes. Thailand has several consumer-credit companies. Buyers will do everything to pay off their loans. They aren't going to walk away. Plus, bankruptcy laws are tough.
Hedge funds performed badly last year, with few exceptions. Why is that? The bond market was strong, gold was up 11% and the U.S. market was flat, but sectors such as utilities did well. This year the economy could contract and stocks could go ballistic as central banks print money. If investors are diversified, they might do all right.

If you are interested in the full Barron's roundtable transcript and have the time to go thru the 9 pages, you can do so by reading the article Listen Up, Class: Here's How to Profit.

Jim Rogers: Short Emerging Markets, Long Base Metals

Jim Rogers is interviewed by ETNow (India) on the 13th of January 2012.

He explains he sees the markets faring relatively well in 2012 because there are 40 elections in the world this year and politicians will spend money to get reelected. However, we may have a serious crisis coming in 2013 or 2014. In 2012, he seems particularly bullish on base metals. He is still short on emergent markets such as Indian, Brazil and Indonesia because they went up too much, too fast.

When asked about Gold, he says he owns it, do not plan to sell, but do not plan to buy for now as Gold has been in a bull market for 12 years without yearly corrections.

How to Invest in Water with ETF

Many emerging countries such as China and India have a large population and are growing rapidly. This put strains on water resources that are needed for agriculture and industry. Jim Rogers who is a well know long term bull on China, said the only thing he can think of that may change China success in the 21st century is if China does not manage its water issues properly.

It's not practical to store potable water as an investment and if you were able to do so, your government would probably seize it if there was a real water crisis. An easier way to invest in Water is to buy companies that provides pipes, valves and solutions to water treatment. You can invest via 2 ETF:

• PowerShares Water Resources (PHO) an ETF focused on small and medium US companies such as Valmont Industries and Badger Meter.
• PowerShares Global Water (PIO) an ETF focused on medium-sized to large international companies such as Suez Environment and KSB Aktiengesellschaft.

Investing in water companies is probably a long term bet (5 to 10 years or more) and you should probably not expect rapid gains, especially in the current environment.

Marc Faber September 2011 Market Commentary Highlights

As I blogged yesterday, Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom market commentary entitled "The Trust of the Ignorant is the Liar's most Powerful Tool".

Black Swan Insights has released a summary of Marc Faber's September 2011 report as shown below:

1. Stocks - Faber says stocks face two potential outcomes: a brief rally to between 1250-1300 on the SP 500 before another leg down (and breaching the 1101 low) or a prolonged trading range with 1100 being the low and 1300 as resistance. Faber thinks the first outcome is more likely, but this could change depending on Fed policy (aka: money printing). Another reason for Faber's bearish posture is the unfavorable seasonality of September (worst month for stocks historically). Investors who have exposure to stocks should use any bounce to sell. If you feel compelled to own stocks, Faber recommends blue-chip stocks like Pepsi and Johnson and Johnson.


2. Gold - Extremely overbought at this level. Could fall to $1500-1600 range during the correction. Faber noted the bizarre relationship between US treasuries and gold. Concludes that the people buying gold were not worried about inflation but a collapse of the entire financial system. Gold should be viewed as more of an insurance policy rather than an inflation hedge. Long-term gold is going significantly higher. Gold stocks may be the better bet than the physical metal in the short-term as they play catch up.


3. US Treasuries - After a huge, fear-inspired rally, US treasuries are extremely vulnerable to a correction. Faber notes that the Daily Sentiment Index is around 98%, indicating a possible top. Furthermore, the "dumb money," a.k.a. the retail crowd, is very bullish judging by their positioning in the Rydex inverse government bond fund. If you own Treasuries, now is time to take profits.


4. Indian Equities (Sensex) - While generally bearish on equities, Faber would advise the gradual accumulation of Indian shares, noting that they are relatively cheap and represent good value. Over a longer time frame (10 years), Faber thinks Indian stocks could appreciate 7%, which is pretty good compared to other investment options.


5. Macro - "This system has become completely corrupted and is being run for the benefit of the billionaires and banking CEO's who have control of the politicians." Faber has harsh words for Warren Buffett, noting that the investment guru profits not because of his genius, but at the expense of the American taxpayer. Buffett represents the very worst when it comes to crony capitalism. His BAC investment will likely prove very profitable, courtesy of the taxpaying middle-class and Buffett's straw man President whom he controls.

Marc Faber: Oil may go up substantially from current levels

Marc Faber was on CNBC-TV18 (Indian TV) on the 21st of February 2011.
He discussed about oil prices, commodities, emerging markets, developed markets and the geopolitical situation with risks in the middle east.

Here's the transcript of the interview:

Q: What have you made on the underperformance in emerging markets (EMs) so far? Is it now beginning to look like a crowded trade — this EM versus developed markets debate?

A: We had a massive outperformance of emerging economies’ stock markets between 2003 and a few months ago vis-à-vis the US. The investors who were by and large overweight emerging stock markets and underweight the US — they are still underweight the US. When the talk about inflation came up — I am not saying it is justified or not — it gave investors an excuse to sell down their holdings in emerging markets and move some money back into the US.

Q: Do you see most of that trade as having played out or do you think emerging markets have not bottomed out yet?

A: I don’t think that emerging markets have bottomed out but it would be now late to sell emerging markets. In many cases, they are down 20% and many stocks, good companies, are down 30% from the recent high. The US stock market has now doubled from its low.

In other words, there are only three occasions in the last hundred years when the stock market in the US doubled within two years. One was in 1934, coming off very deeply oversold condition in 1932 and the other one was in 1937. After 1937 and 1934, the 12 months return, both were negative.

I would be a little bit careful here to just buy the US because investor sentiment is very positive. The volume has been relatively sluggish and the market is extremely overbought by any statistical model.

Q: What about India? If your call is that emerging markets have not bottomed yet, what would you do with India at 18,000 Sensex? What downside do you see here?

A: I was interviewed not long ago, where I said that downside is around 15,000. But many things can happen in the world. Investors have been very complacent about the events in the Middle East.

I am not suggesting that it will necessarily spread to the Emirates to Qatar and to Saudi Arabia but there is always a possibility of some further bad news coming out of the Middle East, which would then, in my opinion, drive up oil prices. Obviously, rising energy prices would be a negative for the global economy — for the US economy and also for India.

Q: What kind of upside risk would you say exist for crude prices themselves?

A: On the upside, if you look at some other commodities like copper, then obviously oil prices could go up substantially even from these levels. I don’t think that oil is expensive compared to other commodities or compared to other goods prices in the world. But that would obviously depend on some political problems — some interruptions in oil supplies or a possibility of the global economy experiencing some kind of a crackup boom. A crackup boom is a boom that is driven by artificially low interest rates, easy monetary policies and debt growth.

The private sector debt growth has slowed down but it has turned up again. At the same time we have, of course, a huge expansion in government debt. That should not be forgotten.

These crackup booms don’t last. They are not sustainable but they can last six months to one year to 18 months and then a renewed setback occurs in the global economy.

Q: At what point would you consider the fact that emerging markets at any rate may be in a bear market now and not just a running correction in the bullish phase?

A: Whenever a market turns down after extended uptrend, you don’t know for sure whether this is the beginning of the bear market or whether it is just the correction in an uptrend. My impression is that if correction could last somewhat longer — then we will have to watch a rebound whether the rebounds can bring new highs or not. If it fails to bring in new highs, the likelihood of a bear market than manifesting itself is quite high.

Q: But if you look out six-nine months, do you see global markets moving in this kind of opposite directions? For instance in the last few months, it has been in opposite directions. The developed markets have moved in one direction and emerging markets in another. Do you see any synchronous movements happening sometime late in 2011 or do you think it will be one versus the other?

A: My view is that the US market will eventually join the emerging markets on the downside because if you take a bearish view about emerging economies, you cannot be too optimistic about the US because for many US corporations, 50% or more of their profits come from emerging economies. My main concerns are these: first of all, I think that not all is well in China. That if the Chinese economy slows down more then what analysts expect, we could have a downdraft in commodity prices and all the warrants on China — whether it is Brazil, Australia or Indonesia — would get hit quite hard.

Secondly, I think that the geopolitical tensions in the world are increasing. In particular, if I were in India, I would be concerned about the events that are now occurring in Pakistan and Afghanistan. This can also have an impact, obviously, on the valuation of equities. We shouldn’t forget that all the central banks in the world basically only know one thing and that is to print money. When things will get bad, they will print more money. If they get worst than bad, they will print more money.

Independently, whether that is the Bank of China or the Reserve Bank of India (RBI) or in the US — all the central banks will keep interest rates artificially low and they won’t increase them to a level where inflation adjusted they are positive.

I would be very concerned about the bonds market.