HONG KONG - After a year in which emerging market investors have taken a beating, the only thing bruised in Marc Faber's office is a ceramic piggy bank.

A gift from U.S. investor Sam Zell, the pink pig has a blackened eye that could easily symbolize the year many emerging markets investors have had. Though most were stung by volatility triggered by the Mexican peso devaluation, Mr. Faber's Iconoclastic International Fund was ranked No. 1 in 1994 with a 27% return.

And, while many of his peers believe the worst is over, the Swiss money manager is now bearish on the emerging markets he has championed for more than decade.

His reasons for caution may raise concern about exposure banks in emerging markets - U.S. money centers included - face in the coming years. For instance, he is predicting a steeper plunge in the Hong Kong real estate market that could sting lenders.

The former head of Drexel Burnham Lambert's Hong Kong office, Mr. Faber says he is cool on emerging markets for the next couple of years because he believes they are now overvalued. He predicts a large correction in the markets could draw his money back to emerging markets, but warns that waiting for the bottom could be slow.

Q.: Real estate is a good indicator of the bank market. What is your view?

Mr. FABER: Real estate in Asia, generally speaking, in the long run, is an attractive investment because you have a rapidly growing population. You have population migration with rural flight and you have a rising per capita space. The demographics and demand for housing growth is very good here. In Asia, we have cycles in real estate. It becomes overvalued and it goes down again, but the long-term trend is very good.

Q.: Even with levels like they are in Hong Kong, for instance, you see it with a good upside?

Mr. FABER: I think Hong Kong is a special case. Before 1949 it was nothing, but because of the Communist takeover of China, it obtained a trading monopoly between China and the western world. Hong Kong became a boom town. I think that when China opens up (in June, 1997) the trade will be diverted away from Hong Kong. Hong Kong will have a lot of the characteristics of cities like Venice, New Orleans, or Detroit. They were once boom cities and then economics changed, the cities declined. I think Hong Kong has seen the Venice of its prosperity and it is going down now.

Q.: What effect do you see 1997 having?

Mr. FABER: You will not be trading a British form of government for a Chinese form of government. No matter what, it will change from a well regulated legal system to a very vague, legal system; a chaotic system that China has. I think it will be quite a messy kind of situation and that will not be very beneficial for the pricing of financial assets in Hong Kong.

Q.: There has been a recent depression here in property. Will that continue?

Mr. FABER: We are now down 20% to 30% off the top and I think we will go down another 50% from these levels. Real estate markets are not like stock markets, they climb much more slowly. In the U.S., commercial real estate declined somewhere in 1988 and just in the last two years it has bottomed out.

Q.: What role have banks played in creating a real estate bubble and what risks do they bare with the threat of the devaluation?

Mr. FABER: The bubble burst a little because interest rates began to rise, but that was only one reason and not the main one. The main reason is because the supply kicked in and the demand slackened.

Q.: And banks' exposure?

Mr. FABER: I think the banks were not the driving force in this boom. Of course they lent money to property developers and property buyers. The driving force of the boom was really the nonexistence of monetary policy in Hong Kong. I don't think we can blame the banks too much for the speculation. The blame would really be on the government.

Q.: Will banks pay a severe price if the downturn you predict comes about?

Mr. FABER: I think so. If you take my negative stance about Hong Kong properties, I think there's the chance they'll go down another 50% from this level and possibly 80%. Obviously, the banks will have a problem. Since the banks already have 40% to 50% exposure to property, which is the most the regulatory authorities want, then who will finance the developments in the next few years? Where will the money will come from?

Q.: With some $150 million in assets you invest, are you putting your money in any Asian banks?

Mr. FABER: I don't have any at present. I'm a little bit cautious about banks throughout Southeast Asia. We had an economic boom between say 1985 and 1993 and I think the boom is coming to an end. In a number of countries, we will have significant readjustment periods. At the moment, because of the more difficult economic environment we face in Asia, banks do not look particularly attractive.

Q.: Change hats and tell me where the opportunities are in Asia for an aggressive bank?

Mr. FABER: Vietnam looks very good. Considering that Vietnam only began to open up in 1989 and the embargo was only lifted a year ago, I think they have come a very long way. The progress is actually quite impressive. I think you have political stability and the country is endowed with a very hard-working and frugal population. We have a hotel investment, but the problem is the financing. There is still practically no bank lending in Vietnam, neither local or foreign. There I see a real opportunity for an American bank. If one were to invest like $100 million in Vietnam for lending purposes, they could build up a loan book that would be quite profitable.

Q.: Looking ahead to China, what impact will it have on the region?

Mr. FABER: We like parts of China, particularly the northern provinces. I'm not so keen about the south. I like the north because it is the industrial heartland of China. I think that in five years time, the center of gravity will be very much in the north and not in the south.

Q.: You put a lot of emphasis on economic history.

Mr. FABER: Yes, because history tells us that centers of economic prosperity do shift from time to time; from one industry to another; from one region to another. I think the fact that the south of China was the first one to open up, lead logically to this being the driving force in industrialization. But today the capital flows into China have shifted dramatically away from the south.

Q.: You are suddenly a bear on most emerging markets. Why?

Mr. FABER: When we began to invest in emerging markets in the late 1970s, nobody else did it. In all fairness, we have discovered so many emerging markets that we have done our doses of being bullish. We are investors. When we see overvaluation and great popularity, we can turn negative. It has nothing to do with the fact that we are quite optimistic about economic growth in some of these countries. But growth can take place and securities prices can perform poorly as they have many times in the history of the world.

Q.: Be specific.

Mr. FABER: I think Asia and Latin America is yesterday's game. The only region where I am really bullish, let's say longer term, is Eastern Europe and Russia. Everything has gone bad in Russia and valuations have been quite low, so I am bullish.

Q.: What has your longevity in these markets taught you?

Mr. FABER: I think I will become very interested again in most emerging markets when many people start to say that stocks are bad investments, that you can only loose money there. We are in a phase like the Chinese water torture: it will take a long time until we reach the final lows.

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