Arnott Sees Opportunities in Emerging Markets

Rob Arnott of Research Affiliates and PIMCO says emerging markets continue to offer some of the better investing opportunities.

“Emerging markets, for the most part, don’t have large deficits; for the most part don’t have large debt burdens,” Arnott says in an interview with Index Universe’s Olly Ludwig. “Not because they wouldn’t be willing to have large debts, but because the markets won’t let them. The debt burden of the emerging economies is 10 percent of the world total. For the G5, it’s 70 percent. Both represent 40 percent of world GDP. So one has seven times the debt coverage ratio of the other. Which would you rather own?”

Arnott also defends his belief in fundamental indexing, a process in which holdings within indices are weighted based on macroeconomic factors — not market capitalization. “Viewed from the vantage point of the macroeconomy, the cap-weighted market is making huge active bets,” Arnott says. “During the Internet boom, Cisco was 4 percent of the market, when it was 0.2 percent of the economy, and that’s a huge active bet. And so viewed from that perspective, Fundamental Indexing is studiously seeking to mirror the look and composition of the economy and using it as an anchor to contra-trade against the market’s constantly changing views, expectations, speculations, fads, bubbles and crashes.” Indexing by cap weight, he says, “winds up loading up on growth companies, safe havens, weighting companies in proportion to their popularity”.