It’s only a matter of time till runaway debtors such as the United States hit the wall, investor Rob Arnott argues.
Arnott, who runs the value-focused Research Affiliates investment manager in Newport Beach, Calif., writes in his monthly newsletter that it’s imperative that bond investors diversify away from debt-soaked rich countries such as the United States.
The reminder comes at a time when the latest flight to safety is on. Investors have been pouring funds into bonds issued by big governments, driving yields down to levels seen previously only in the depth of the 2008 financial crisis.
But Arnott joins the chorus of voices questioning that choice. Looking strictly at nonpolitical factors, Arnott contends that the best bets for bondholders lie in faster-growing developing countries and in more prudent developed countries, such as Australia and Canada. The biggest debt issuers, he continues, are the biggest, most underappreciated risk of all.
The action in the markets this year suggests the answer is no time soon. But Arnott says it’s time to confront the problem before it becomes acute.
The issue, Arnott says, is that sovereign debt investors have much more exposure to the five richest countries – the United States, Japan, Germany, France and the United Kingdom – than is justified by those nations’ economic output, population or share of global resources.
The so-called G-5 nations account for 68% of global sovereign debt outstanding, Arnott indicates. That’s almost three times the weight they should carry, according to a Research Affiliates estimate.
Meanwhile, emerging markets account for just over 10% of debt issued but should command a 58% share of investors’ wallets, based on Research Affiliates’ assessment of their economic, demographic and resource data.
If that’s not enough, he contends the debt problems in the stressed European countries known as the PIIGS, for Portugal, Ireland, Italy, Greece and Spain, aren’t markedly worse on this basis than in the rest of the developed world. We are all pigs, if not PIIGS, is the message.
Arnott then invokes a 1980s vintage seatbelt ad to warn that the past decade shows too few people learn the appropriate lessons till it’s too late.
It seems we aren’t.