Renowned contrarian investor Marc Faber recently published his Gloom, Boom and Doom report for November. Mr Faber raised the question, "is the Chinese stock market in a bubble?" The short answer is yes, but it could go on for much longer.
Pointing out the absurdity of some of the valuations being attributed to Chinese companies, we discover that the market capitalisation of the Industrial and Commercial Bank of China exceeds that of Citigroup, despite Citigroup's profits being three times the size. Six of the world's largest companies by market capitalisation are Chinese. This sounds a lot like the rise of the Japanese firms of the 1980s.
While acknowledging the extreme price level of the Chinese market, Mr Faber concedes there is room for the bubble to keep expanding.
"…is it possible that the world's largest country, which is joining the global economy at an unprecedented rate of growth, will have by far the greatest stock market bubble in the history of capitalism?"
Instead of joining the party, Mr Faber is recommending caution.
"Would I buy or recommend purchasing Chinese stocks now? No, for the simple reason that the parabolic increase in the stock market is likely to top out before the 2008 Summer Olympics, as the China mania is likely to reach its peak around that time."
After then moving on and discussing monetary matters and currencies, Mr Faber highlights gold as his top investment pick in a world of frothy markets.
"…while I find the gold price to be currently somewhat overbought, I still think that gold will be one of the best investments over the next couple of years."
However, the contrarian investor points out he only recommends gold because of the special monetary circumstances that global investors find themselves in.
"I wish to add that I am not a gold bug. I would much prefer to live in a world in which central banks' top priority was to safeguard paper money's purchasing power and its function as a ‘store of value'."
