The Royal Bank of Scotland has warned clients to “sell everything except high quality bonds” in advance of a “cataclysmic year” in which European and US stock markets could slump by up to 20%, and the price of oil could collapse to $16 a barrel.
In a note to clients, the bank said the current market environment bears many of the hallmarks of the period preceding the fall of Lehman Brothers, which signaled the financial crisis.
This time round, RBS believes China’s economic slowdown and the fall in the value of the yuan are to be the fundamental drivers of a global recession.
“China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous.”
To date, stock markets have performed underwhelmingly in 2016, with the FTSE 100 suffering its worst start to a year since 2000, and the Dow Jones industrial average its worst ever.
Andrew Roberts, RBS credit chief, believes the FTSE 100 is particularly at risk given the prevalence of commodity stocks on the index.
Markets have been supported for some time by a combination of negligible interest rates, stimulus measures such as quantitative easing, and investor confidence in a future economic recovery. As quantitative easing is rolled back, and rates begin to rise, this triumvirate of tailwinds may become headwinds.
“We suspect 2016 will be characterised by focus on the exiting of positions in the three main asset classes that benefited from quantitative easing; emerging markets, credit, equities…risks are high.”
A bearish outlook for the global economy is not unique to RBS. In the past fortnight, Morgan Stanley has forecast oil could fall to $20 a barrel, while Standard Chartered has predicted an even bigger slide to $10 per barrel. JP Morgan analysts have advised clients to sell any equity holdings as soon as there is a bounce in prices.
Others, such as Ben Brettell, senior economist at investment firm Hargreaves Lansdown, are less pessimistic.
“If you look hard enough you can always find somebody telling you markets are about to crash, but they are normally wrong,” he says.
“Historically equities have been the best asset class over the long term and listening to the Private Frazers [a reference to a character in Dad’s Army, a UK television comedy] of this world has been a mistake. It’s easy to be panicked into selling, but very few will have the courage to buy back in when markets are lower. Did those who sold in 2008 buy again when the market bottomed in 2009?”
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