“The healthy economy is one that makes its own decisions,” says Rob Arnott of Research Affiliates concerning possible fallout from Britain’s vote to stay or leave the European Union. In a recent CNBC interview, Arnott shared his views on the concern around Thursday’s result and how it will impact the markets.
According to Arnott, the “fear mongering” around the vote is “a little over the top.” He says, “Roll the clock forward ten years. Is Europe still going to be trading with the U.K.? Of course they will. Will it be materially different from today? Of course not.” That said, he concedes that an exit vote would cause a rocky road over the next 2-3 years. But when asked about rumors that the ECB would provide a “back stop” to what might be a shaky market, his view was clear: “Is that the role of the ECB? Buying stocks? Come on, let’s let the market sort this out.”
The issue of low interest rates was another hot button for Arnott. He asserted his belief that it’s “destructive” for central banks to force interest rates below the rate of inflation. He says the resulting negative cost of capital discourages companies from funding new initiatives with a long-term view. Instead, he says, “they use free money to invest in stock buy-backs, which isn’t an investment in the future.”
Regarding the bond market, Arnott argues that the inflow of dollars (which is pushing tickets up and yields down) is putting investors between a rock and a hard place. “If you’re left with the choice of U.S. stocks versus zero-yielding bonds, that’s not a pleasant choice.” However, he points out that there are inexpensive emerging market stocks and bonds now priced at an attractive 6 times earnings (as represented by market fund indices).
While Arnott warns that the shares are cheap due to fears that should be considered, he says investors should “buy some, recognizing that you can’t buy the bottom. If it gets cheaper, you buy more.