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RBS says ‘sell everything’ in 'cataclysmic' warning

The investment bank warns a global deflationary crisis will send markets into freefall.  

RBS says ‘sell everything’ in 'cataclysmic' warning

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.’

Goldilocks love-in

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.’  

Overblown reaction

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.’  

46 comments so far. Why not have your say?

Jeremy Stewart

Jan 12, 2016 at 17:17

Frankly I think this kind of scare-mongering is appalling. A couple of like comments and the effect for many people could be immediately and unnecessarily disastrous if their savings and pension funds start collapsing overnight. It is one thing advising their own clients to do this in private but to blazon it to the world in this manner is indefensible. Someone should have their knuckles severely rapped.

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frustrated saver

Jan 12, 2016 at 17:29

why is scaremongering because u dont beieve it ...Ican assure you many think markets are skating on very thin ice

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Ian speedy speed via mobile

Jan 12, 2016 at 17:30

Couldn't agree more @Jeremy Stewart.

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Jan 12, 2016 at 17:35

This is good news. I take it that RBS will sell all of their investments and payback the UK taxpayer..........wait a minute, you mean they don't actually have any shares of their own????

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John Blaimont via mobile

Jan 12, 2016 at 17:36

I think Jeremy Stewart is wrong to suggest the that RBS keep their thoughts to themselves and reveal them only to their punters. Surely all modern thinking Is about transparency in markets " tell the truth and shame the devil".

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Jeremy Stewart

Jan 12, 2016 at 17:46

I am not saying there is not a chance of it being true - everything has its possibilities - but that to issue an outright statement like this can bring about panic in people's actions and we all know the inevitable consequences if a slide starts anywhere: only a relative few would escape a major fallout. Banks and investment houses have a responsibility to be guarded in what they say and do - yes, I know that's utopian considering what has already gone on - and not just issue random prophecies of doom to the public.

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White Stick follower

Jan 12, 2016 at 17:46

Perhaps someone is looking to make a killing by talking down rather than talking up? Given the track record of RBS would anyone take any notice of its 'experts' ?

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Data protection?

Jan 12, 2016 at 17:47

After the mess made by RBS itself, why listen to them at all. Or are they trying to be market movers like Goldman Sachs etc.?

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Squareblade via mobile

Jan 12, 2016 at 17:57

Mmmm... Agreed. Who would take financial advice from an organisation that almost single handedly, wrecked the UK economy?

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J Thomas

Jan 12, 2016 at 17:58

Where were the flashing RBS lights in 2007 before they bought ABN AMRO. You know, just before they lost 97% of their value.

Some people have been saying the markets were going to tank six months ago, including myself for which I was given dogs abuse, so RBS are rather late to the party now it is fashionable.

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Andy W

Jan 12, 2016 at 17:59

If enough people listen to them and and scared enough to sell, that will depress prices, causing others to sell, further depressing prices, etc, etc

Then it will indeed become a 'perfect storm' of panic-selling and they'll be able to say 'told you so'...

Brilliant, well done RBS.

Perhaps I should sell-up and put all my money into a cash ISA paying 0.75% - can anyone think of a major High-St bank ?

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Pat Murphy

Jan 12, 2016 at 18:03

Why not make dramatic statements like this...worth the will be lauded if you are proven right but instantly forgotten if hopelessly wide of the mark...what is RBS track record of calling market tends in the past?

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Robin Crisp

Jan 12, 2016 at 18:04

I wonder to what extent the banks are exposed to commodity company debts?

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Jan 12, 2016 at 18:06

There was a time in the past when clearing banks thought they could copy the investment banks. They played around with mortgages.

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Jan 12, 2016 at 18:12

There are almost enough bears around to make me turn bullish.

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Jan 12, 2016 at 18:25

I think it was J Pierpont Morgan who said "Buy when the blood is running in the streets, sell when the trumpets sound." Did well for him!

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Jan 12, 2016 at 18:31

Alternatively they're simply stating the bleeding obvious.

Central banks and the crooks behind them have created a monumental house of cards that's seen financial asset prices rocket with an ongoing fraudulent helicopter money experiment,zero cost borrowing bonanza and soviet style dictat.

All explicitly designed to save their wealthy client's hides at everyone else's expense.

A purging of all the toxic interference and manipulation is what's required, without any get out of jail free cards or forever in the future taxpayer safety nets for the privileged fraudsters orchestrating the inevitable disintegration.

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Law Man

Jan 12, 2016 at 18:34

"Shares may fall 10-20% this year."

If you could not tolerate this, you should not be holding shares. For a cautious investor, shares should form some 50% of the total portfolio: so if the other assets (bonds etc) remain unchanged, the loss over a year is 5-10%. Unpleasant but hardly a disaster.

What would be awful is if shares fall 20% and then do not rise by the end of a further 5-10 years.

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David Andrews

Jan 12, 2016 at 18:41

I thought it was Baron Rothschild.

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Jan 12, 2016 at 18:45

Well said, RL!

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SebO via mobile

Jan 12, 2016 at 19:11

These responses claiming RBS are irresponsible and hopelessly wide of the mark only go to prove what a "Good news" business markets are. People don't want to hear negative views, how dare they etc etc.

Markets don't just go up, they can go down, and given the fact that virtually every asset class out there has performed very well (barring commods) it should come as a surprise to know one that this trend must come to an end.

All the world's Quantitative easing and throwing money at the problem has done very little to ease the underlying economy. UK's Industrial Production was reported as a -0.7% today, but yet some still clamour for interest rate hikes, on that grounds exactly.

In the U.S. and Europe transport of goods data has been quite frankly miserable for months now with severe year on year declined. In the U.S. Valuations are near historical highs for the market while margins are at all time highs. These are only going way and a Chinese economy that is teetering on the edge might well just be the straw that breaks the camel's back.

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Chris Clark

Jan 12, 2016 at 19:28

@Pat Murphy I've logged the RBS article to review it on this day next year, and see how accurate it was. I have to say on previous blood and guts predictions made by other pundits, nothing had fallen off the cart by the time the supposed time of prediction arrived.

I'm still bemused at the 'Greece will crash out of the EU by May (2015)' one from last year.

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geoffrey mulford

Jan 12, 2016 at 19:29

How to make money.

Sell all your shares and then tell everybody to sell because the stock market is about to crash.

Then buy shares and tell everybody shares are going to the moon.

I will just continue to hold my share.

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David Mason

Jan 12, 2016 at 19:52

The Irony that this comes from RBS is not lost on me. They certainly know everything about cataclysmic IT systems!

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Jan 12, 2016 at 19:56

Just a thought.

The Shanghai composite index, after all the fear of falling indices etc, has now fallen to the point where it is now only 50% higher than it was 18 months ago. Yes HIGHER.

Date Index

20/06/14 2027

02/01/15 3235

12/06/15 5166

02/10/15 3053

20/11/15 3630

12/01/16 3023

It very difficult looking at these figures to see any link between the state of the real economy in China and the fluctuations of the Shanghai index.

June 2015 was clearly the peak of a bubble, driven perhaps by rapidly increasing retail participation in the market.

In the preceding two and a half years the index varied within a band of between about 2000 and 2400. Unless there are major structural factors to justify the higher ratings, it would seem reasonable to expect the index to move closer to these historic values.

As it is generally concluded that the Chinese economy is still expanding strongly, these wild movements in the speculative Chinese stock market may in fact have little impact upon real world flows in trade.

Perhaps we should be rather more concerned at the increasingly fragile state of Central banks in the Western world!

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Jan 12, 2016 at 20:03

David Mason - nor me! But even so it does feel that markets are on a knife edge, perhaps a classic 'J. Pierpont Morgan moment' is about to descend. All it takes is the courage, and a little cash, to buy when everything is bombed out. But what sectors to go for?

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geoffrey mulford

Jan 12, 2016 at 20:35

One thing people must remember.

RBS is not your friend they are not saying this to help you.

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David Andrews

Jan 12, 2016 at 20:45

This was a research note to their paying customers, so one has to believe that they are supposed to be helping them.

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Dennis Cochran

Jan 12, 2016 at 20:51

What's wrong with folk? No big deal.This was all predicted 20 years ago. Recommended reading "The Death of Inflation - Surviving and Thriving in the Zero Era" by Roger Bootle (the Martin Peters of capitalism, 20 years ahead of his time). Good luck risk-takers..

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David Mason

Jan 12, 2016 at 20:57

Hopefully the paying customers will conduct due-diligence (unlike RBS with ABN!)

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Chris Clark

Jan 12, 2016 at 21:01

@David Andrews I seem to have read several times of bank investment analysts with high fee paying clients who said afterwards "I just told them whatever they wanted to hear and they were delighted with it."

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David Andrews

Jan 12, 2016 at 21:37

@ Chris Clark

So you're happy and they are happy. The much vaunted win-win position then.

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Chris Clark

Jan 12, 2016 at 22:16

@David Andrews Oh no, not at all. I'd run 100 miles from a bank's advice. I have pegged the article to look back on it on 12th Jan 2017 and see how right they were.

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Frank Frank

Jan 12, 2016 at 22:20

RBS analysts have the worst track record in the world bar none. I would not trust them to tell me the rice of apples at Tesco next week.

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Frank Frank

Jan 12, 2016 at 22:22

RBS analysts have the worst track record in the world bar none. I would not trust them to tell me the price of apples at Tesco next week.

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Roger ellis via mobile

Jan 13, 2016 at 03:00

Lower inflation has been happening for quite some time. China's lowering currency will exacerbate this via it's exports. However assuming the UK economy stays on track with steady low growth, low oil/fuel prices then surely consumables is the place to be. Terry Smith operates in that area with fundsmith. As far as the RBS note goes it is way over the top and probably will be proved irresponsible. I suspect it's already been regretted. 501

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Jan 13, 2016 at 05:23

RBS acting on behalf of HMRC, who will clean up on the CGT liabilities arising.

And then when to go back in to preserve the income of the divi payers?

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Jan 13, 2016 at 09:32

David Andrews suggest that " I think it was J Pierpont Morgan who said 'Buy when the blood is running in the streets, sell when the trumpets sound.' Did well for him!" was from Baron Rothschild rather than Pierpont Morgan. I think he may be right but it is also attributed to John Davison Rockefeller.

Either way it is good strategy. but requires sufficient immediate reserves in order to pursue it.

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Rupert Otten

Jan 13, 2016 at 11:57

What RBS is saying to me is that we are in for a prolonged period of deflation. This makes the yield on quality bonds look very attractive indeed and suggests that a rebalancing towards bonds may be sensible. One year ago the markets were confidently predicting rising interest rates and a rout on bonds.

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richard tomkin

Jan 13, 2016 at 11:57

RBS should know everything about freefall.I would not give the time of day to any musings from their "Head of Credit".

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Anonymous 1 needed this 'off the record'

Jan 13, 2016 at 15:04

who was that other perma bear at rbs?

think his name began with a j?

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Jan 16, 2016 at 11:10

I wonder what George Osborne's thoughts are on RBS's comments?

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jon smith

Jan 16, 2016 at 11:23

reality check for osborne? no gordon brown to blame for this global crisis!-you can guarantee that osborne will squim like a hooked worm to distance himself from this one!!!! not me guv!!!

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Jan 16, 2016 at 11:29

I've been inclined over many years to sit tight and ride out the storm, with reasonable success, mindful of advice given by one financial expert who said: "You never lose money on a share until you sell it."

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Johan Carstens

Jan 16, 2016 at 15:20

Andrew Roberts from RBS does not have a good forecasting record. If you keep being negative, you must get it right sometime. I would not take much notice of his opinions, especially the doom and gloom kind.

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gordon neale22580

Jan 16, 2016 at 18:45

I dont think RBS care about any clients even wealthy clients they must have there own agenda

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