Rob Arnott Still Has Faith Emerging Markets Will Deliver For Investors
Emerging markets have generated dismal returns year-to-date; especially relative to U. S. equities. Investor sentiment towards the developing world is at a low ebb; typical for an underperforming asset class.
Olly Ludwig at IndexUniverse recently interviewed Rob Arnott, founder of the pioneering fundamental indexing firm Research Affiliates. Much of the interview is focused on the topic of fundamental indexing.
Early in the interview Arnott pointed out that value investing has suffered from poor performance over the past few years:
Value investing, since 2007, has been a disaster all over the world. It’s underperformed in the U.S.; it’s underperformed in international markets; it’s underperformed in small-caps; it’s underperformed, even in the last five years, in emerging markets, which is an area where value never underperformed.
Arnott mentioned the peculiarity of investors:
We’ve got to be in the only business on the planet where, when products are trading at a steep discount, client appetite evaporates.
After a lengthy discussion of the fundamental indexing concept, Arnott proceeded to discuss the emerging markets:
What’s going on with emerging markets, you’ve got emerging markets trading at a Shiller PE ratio of 13 when U.S. stocks are at 24. Back in 2007, emerging crested at 37 Shiller PE at a time when U.S. was at 26. So it’s been a complete about-face, from an 11 points higher price to 11 points lower price. And now people are scared of putting money into emerging markets. To me, this is a wonderful-—this is the closest thing to low-hanging fruit I’ve seen in the global stock market since February 2009.
Back in October 2011 Arnott said the best investment over the coming five years would be a fundamental index for emerging markets stocks. He also suggested buying Bank of America, while shorting the stock of Apple [link].