View the article online at http://citywire.co.uk/money/article/a872993
RBS says ‘sell everything’ in 'cataclysmic' warning
The investment bank warns a global deflationary crisis will send markets into freefall.
Royal Bank of Scotland (RBS) has told investors to run for cover with 2016 set to be a 'cataclysmic' year for markets.
According to reports, in a note to clients the investment bank said: ‘Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall the exit doors are small.’
RBS' primary fear is the world is heading for a deflationary crisis, which could see a fifth wiped off global stockmarkets and oil falling to $16 a barrel.
Overnight the brutal sell off in oil deepened, with the price falling by another 5.3% to a fresh 12-year low of $31.41 a barrel.
Meanwhile the US S&P 500 stock market index has lost 5.8% since the turn of the year, with the UK's FTSE 100 down by a similar margin.
RBS’ oil forecast came as Morgan Stanley offered an almost as bearish prognosis, saying the price could fall to $20 on the back of concerns over China’s currency policy.
‘Oil in the $20 is possible,’ Morgan Stanley analyst Adam Longson said in a report on the commodities sector. [Chinese currency depreciation] could lead to another round of commodity weakness and send oil into the $20s.’
RBS head of credit Andrew Roberts believes we are about to enter uncharted waters as high debt ratios and China problems combine against a backdrop where global trade and loans are contracting.
‘China has set off a major correction and it’s going to snowball,’ Roberts said. ‘Equities and credit have become very dangerous and we’ve hardly begun to retrace the “Goldilocks” love-in of the last two years.’
While Roberts predicts European and US shares will fall by between 10-20% this year, he fears the fall in the UK could be more severe.
‘London is vulnerable to a negative shock,’ he said. ‘All these people who are long oil and mining companies thinking the dividends are safe are going to discover that they’re not at all safe.’
Roberts also questions the consensus that Chinese policymakers will adopt a measured approach, highlighting the nation needs a ‘dramatically lower’ currency.
‘We are deeply sceptical of the consensus that the authorities can “buy time” by their heavy intervention in cutting reserve ratio requirements, rate cuts and easing in fiscal policy,’ Roberts said.
The grim RBS warning comes after billionaire investor George Soros last week compared the current climate to the global financial crisis which battered markets in 2008.
‘When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008,’ Soros said at an economic forum in Sri Lanka.
‘Unfortunately China has a major adjustment problem and it has a lot of choices and it can actually transfer to the rest of the world its own problems by devaluing its currency and that is what China is doing.’
However, others believe the market is overplaying China’s troubles. These include Neptune Investment Management's James Dowey (below), who said the current volatility in markets has precisely the same cause as the bout experienced last August.
‘As the Chinese RMB is pegged to the US dollar, US monetary policy gets exported to China. This means that a strong US economy and a weak Chinese economy give rise to a tug of war at the centre of the global financial system,’ said Neptune's chief economist and chief investment officer.
‘However, I believe the market’s gloom and doom is over the top. This is because the policy solutions are simple, feasible and being executed by the US and Chinese authorities,’ he said.
Dowey feels the lack of trust in the Chinese government could be the major reason why the market has reacted so negatively to the renminbi's (RMB) depreciation against the dollar.
‘The market supposes that there is a significant chance that rather than duly following the prescription of the economics textbook, the Chinese government has simply lost control, with currency weakness being a manifestation of the demise,’ he said.
Dowey said while this may be understandable given the poor quality of Chinese economic data, he does not believe it is the correct interpretation of what’s going on in China.
‘The market is worried about knock-on effects of a weaker RMB on China’s trade partners. This is a more substantive concern, but markets are already braced for a poor outlook in emerging economies in the near term, on account of the slowing of Chinese growth and the tightening of US monetary policy,’ Dowey said.
‘With emerging markets equities at one of their cheapest ever levels in history, it is not as though the market is in need of a reality check on emerging markets.’
News sponsored by:
Making the most out of Europe's potential means seeing things differently. Learn more about how BlackRock's focused approach to investing in Europe helps investors unlock the continent's vast potential.
In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
More about this:
More from us
- Albert Edwards: S&P could plunge 75% when bear roars
- Richard Buxton: three key risks, three silver linings
- Capital Economics: we won't see $100 oil again this decade
- Paul Read: how to buy bonds in a time of rising interest rates
Tools from Citywire Money
From the Forums+ Start a new discussion
Weekly email from The Lolly
Get simple, easy ways to make more from your money. Just enter your email address below
An error occured while subscribing your email. Please try again later.
Thank you for registering for your weekly newsletter from The Lolly.
Keep an eye out for us in your inbox, and please add firstname.lastname@example.org to your safe senders list so we don't get junked.
by Michelle McGagh on Mar 30, 2017 at 10:01