European stocks, which have been in a broad upswing for the past three months, could retreat by up to 20 percent, presenting an opportunity to move back into the market, says Marc Faber, author of The Gloom, Boom & Doom Report.
Faber, who rose to prominence after predicting the stock market crash of 1987, told CNBC on Thursday that he started to buy European shares for the first time in June. That month marked a low for European equity markets, which shed about 15 percent of their value in less than three months.
Europe’s equity markets are a safer bet compared to other European assets amid a bleak economic outlook, according to Faber, who said he would use any pull back in the market as a buying opportunity.
“I think European markets could easily correct 10 to 20 percent from the recent highs that we have had, but I don’t envision new lows,” Faber told CNBC Asia’s “The Call.”
“I bought some shares in Portugal, Spain, Italy, and France, and after I bought them in the last three to four months, the market rallied strongly,” he said. “I am negative on equities for the next three months, I’m not saying they will collapse but they will go down and I will add to my positions when the market corrects here.”
Faber, often referred to as Dr. Doom because his commentary generally veers on the negative side, said his investment decisions were based on his view of a collapse in the global financial system.
If troubled peripheral members of the euro zone leave the currency bloc, investors could position for this by buying European shares, he said.
“In the worst case scenario that the euro collapses and Spain and Italy for example exit the euro zone, the markets of these countries will adjust to the upside,” Faber said.
He added: “Also if you are an investor in one of these countries, what are you going to be more comfortable holding — the deposits in one of your banks or equities? So, I think a lot of money is flowing into these equity markets because the perception is that they are safer than bank deposits.”
Europe’s stock markets have rallied about 14 percent since early June, driven higher by expectations that European policy makers will implementrigorous policies to shore up countries such as Spain that have faced pressure from high borrowing costs this year.
Faber said he also favored holding physical gold , an asset that was likely to hold some value in the event of a collapse in the world’s financial system.
“I would hold physical gold with a country that has a culture with gold such as Australia. In a collapse, the gold price could fall 50 percent, but if everything else falls by 90 percent, then you are relatively well off. So I would hold some physical gold regardless of the economic outcome,” Faber said.
Gold has been in the spotlight this week after it rallied to six-month highs amid expectations that the U.S. Federal Reserve(learn more) and European Central Bank(learn more) will deliver further monetary stimulus soon.
—By CNBC’s Dhara Ranasinghe