Arnott is making long-term bets on emerging markets because his calculations make him gloomy about U.S. stocks and the long-run growth of the U.S. economy. As he told Bloomberg.com, the rest of the world is full of opportunity for the patient and brave investor.

What’s the biggest source of risk for investors today?

Markets are expensive. The most popular markets, particularly U.S. growth stocks, are priced to an expectation that things will sort out very, very well. It leaves very little room for disappointment.

What assets or investments are overhyped?

U.S. equities are among the more expensive markets in the world. I wouldn’t describe it as a bubble but I’d describe it as very expensive. U.S. stocks are priced at a Shiller P/E ratio – price relative to 10-year earnings – of 27 times. It’s been higher twice in history, during the tech bubble and in 1929.

So anyone buying U.S. equities is making one of two assumptions. [First, that] U.S. equities are still, today, priced to offer solid long-term returns relative to the whole spectrum of alternatives available. I don’t believe that.

Or, they believe they’ll hear the bell chime when the merry-go-round stops. And they’ll hear it before others do. That’s a pretty heroic assumption.

Or, [they can] recognize that maybe this is a game that they prefer not to play. I fall squarely in the latter camp.

So what games do you play instead?

There’s a [wide range] of markets available to us and some are pretty cheap. Emerging market stocks are priced at 15 times their 10-year earnings. If you use a fundamental index, they’re priced at 11 times their 10-year earnings. Eleven times. That’s cheap.

I’d much rather put my money there and wait patiently than try to play the game of guessing how much further this bull market can run. Folks who harbor the illusion that they can pick the top are deluding themselves.

David Fuller's view

Certainly Rob Arnott is right about the US market being expensive today.  However, its leadership in technology and the number of sector-leading multinational Autonomies makes it an attractive prospect for the longer term, in my opinion.

If I was investing in one emerging market for the longer term it would be India.  However, it is also somewhat expensive, trading at similar valuations to the S&P 500.  Nevertheless, India now has terrific governance, and that is a vital quality too often overlooked.  I do not think that there are any better indicators than national and corporate governance, best assessed with commonsense and life experience.