Dr Marc Faber is shockingly iconoclastic in his views on investor relations. But then Asia’s most celebrated stock market bear holds controversial opinions about almost every discipline annexed to the development of global financial markets.
In a small smoke-filled office in Hong Kong Central, Faber expounds his thesis that investor relations is partly to blame for the massive over-valuation of world stock markets that he believes threatens the globe with financial armageddon. ‘In the current financial mania, firms are caught up with the idea that they have to manage the perception of their business by the financial community,’ he says. ‘CEOs should be concentrating more on managing their businesses and less on their share price.’
‘The present emphasis on creating shareholder value has led CEOs to do all kinds of tricks to keep earnings up. A lot of management has been misleading investors. It is the classic dilemma for a business man: how much time should he spend marketing his company, and how much actually on the job?’
Author of the monthly newsletter The Gloom, Boom & Doom Report, an advisor to a slew of emerging market funds and the subject of a popular new book, Riding the Millennial Storm, Faber is well known for taking a contrarian line. Indeed, he often says in public what many market commentators would hardly dare to think in private, and the rich and famous of Asia regularly solicit his views.
Stealth market
According to Faber, Wall Street has already moved into a bear market phase. He calls it a ‘bear market by stealth’, and notes that only the stellar valuations of the top 50 US stocks are supporting the headline indices. Behind those stocks are a legion of major US corporates whose shares are already 20-30 percent down from their peak. In fact, investors have been selling second line stocks and piling into the top league, further inflating their valuations (see Going large, page 42).
Faber believes the bear market’s second leg will come when something happens to trip up the performance of the biggest US stocks. This may take several months to occur, but the worldwide impact of a US stock market crash on global equity markets would be devastating. It leads Faber to conclude that even incredibly cheap markets like Russia are not worth buying just yet.
He points out that the six largest US technology companies have a combined stock market capitalization of $1.6 trillion, and you could buy the entire Russian stock market for just 1 percent of this valuation. ‘I am quite convinced that a basket of emerging market securities will outperform these six stocks over the next five years, even if some temporary pain has to be endured,’ Faber adds.
So what should investor relations professionals be doing in the face of such a Wall Street collapse? Do they have a role at all?
In Faber’s ideal financial world investor relations would concentrate more on providing honest and reliable data for analysis, and less on the distracting razzmatazz of presentations. And he believes that in the coming bear financial markets this will be exactly what fund managers will demand from IR.
‘People will not be interested in lies from the management to boost the share price, or managers who paint a favorable picture when faced with adversity. They simply will not believe them anymore. The idea that management knows the future is a fallacy anyway. Nobody foresaw the Asian financial crisis. And equally nobody will admit that they are about to go bankrupt.’
So the nature of the IR discipline will change in a market downturn, according to Faber. His reckoning is that fund managers will be far less receptive to upbeat presentations, and will instead demand more factual information. The premium will be on proving that a company can survive in a downturn rather than on explaining growth projections to a receptive audience. Obvious enough, but it would still come as a shock to the conventional mind-set of a western IRO.
Treading carefully
Even if Faber’s stock market views are proved hopelessly wrong, it never does an IRO any harm to consider the downside. The function has developed apace on the back of the global expansion of equity markets, and its practitioners will have to tread very carefully to avoid the pitfalls of a major bear market. However, the dynamic response to the Asian financial crisis by IR professionals shows that even a major market slump can provide new opportunities.
But Faber has a serious point. Investor relations will have to change its message. ‘Good news has no effect in a bear market, and even bad news will not be perceived in the same way,’ he adds. ‘Sometimes a bit of bad news will actually be received in a positive way, as showing that the management is on top of the situation, and good news will be ignored.’
He explains his own view of IR: ‘I am always more interested in information than presentations, and prefer to read rather than go to a management meeting. It is useful to have some contacts on the personal level, so that management may give you a slightly different story. But I really feel the emphasis on management meeting a lot of investors all around the world has gone too far. Managers should be looking after their business, not the share price. It is a sign that stock markets are too high.’
Now 53 years old, Faber has seen numerous bull and bear markets during his long career, and has an admirable record on calling the top. He sold everything a week before the crash in 1987, and was one of the few market commentators to get the Asian crisis right. Early last year he advised investors to buy some gold, and was widely dismissed as a lunatic. Then gold turned into one of the best investments in 1999. Perhaps unsurprisingly, his nickname in Hong Kong, where he has lived since 1973, is Dr Doom.
Crash flashback
Between 1970 and 1978 Faber worked for White Weld & Company in New York and Zurich before moving to Hong Kong. The experience of the 1973 US stock market crash made a particularly strong impression on the young Dr Faber, and the November 1999 issue of his Gloom, Boom & Doom Report makes it clear that this is where he reckons Wall Street is heading today.
‘In a mania, the economy has moved into a new era which justifies not only sky-high valuations but all other speculative excesses,’ he writes. ‘Thus negative earnings announcements are perceived to be company specific and not indicative of a deteriorating overall trend. Academics, government officials and business leaders will then explain rising interest rates or worsening external trade and current account balances to be merely a consequence of economic strength and not weakness. Hence bad news is regarded as just a temporary aberration with no long-term impact on the investment merits of the main theme.’
‘I have personally experienced many bubbles and investment manias, and can confidently say that none came to an end on the first set of bad news. In early 1972, inflation began to accelerate and interest rates rose, but the stock market continued to rise until January 1973. And even the sharp rise in interest rates in 1973 had only a moderate adverse impact on the market, which rallied again and again. Most remarkably, the market did not fall right away after Opec announced, on October 16, a 70 percent increase in oil prices to $5.11 per barrel, but continued to rally until October 29. Only, thereafter did reality set in and lead to a steep decline in November 1973.’
Faber concludes that Wall Street will drift past the early part of this year perhaps even posting new highs. But then some unforeseen event – it could be an oil price hike – will lead to a sell-off of historical proportions, catching many investors unaware. ‘Any great period of wealth creation is followed by a period of wealth destruction,’ argues Dr Doom. And behind the scenes many of Asia’s biggest investors agree with him. Australia’s richest man, Kerry Packer, told Faber recently that there is nothing worth buying in current markets; and the Hong Kong banks are awash with cash.
Moving on down
But being a purveyor of gloom and doom has its downside too. Faber is downsizing his own operation in Hong Kong and moving to Thailand in April. Annual overheads of $750,000 in Hong Kong are now too high for Dr Doom, who clearly thinks the demand for his services will be depressed by a downturn, and that there will be little financial reward for being proved right. Assuming that his predictions come true, that could be a pessimistic assessment. But then pessimism is a difficult trade.
Yet Faber remains an interesting and thought-provoking figure who stands out from the general conformity of the financial community. And while it may be fashionable to project optimistic business assessments into a future of limitless possibilities, IROs might like to consider what to do when the good news runs out. History – rather than Faber – dictates that it will happen; the only question is when
