Clients told to seek safety of Bonds and Treasuries. 'This is about return of capital, not return on capital. In a crowded hall, exit doors are small
Western stocks will fall by 20 percent. Oil will trade at $16 a barrel. Emerging markets will crumble as China assumes the role of Lehman Brothers in the not so eagerly awaited sequel to the 2008 financial crisis.
That preview of the next 12 months is brought to you by the Royal Bank of Scotland.
“Sell everything except for high-quality bonds,” RBS credit chief Andrew Roberts writes in a note to investors that reads like the voice-over in a trailer of a finance-themed horror film. “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”
Roberts said that all of the red flags the bank has been monitoring — collapsing oil prices, volatility in China, rising debt, deflation, and weak corporate loans — have made their presence felt in the very first week of trading. The FTSE is already down 5 percent, its worst start since 2000, while the Dow Jones industrial average has never opened a year this poorly.
And the Scottish bank isn’t the only big bear in today’s market. J.P. Morgan has advised its clients to sell stocks at the next bounce, while Standard Chartered predicts that oil may soon fall to as low as $10 a barrel.
RBS first issued its grim warnings for the global economy in November but events have moved even faster than feared. It estimates that the US economy slowed to a growth rate of 0.5pc in the fourth quarter, and accuses the US Federal Reserve of “playing with fire” by raising rates into the teeth of the storm. “There has already been severe monetary tightening in the US from the rising dollar,” it said.
RBS said the epicentre of global stress is China, where debt-driven expansion has reached saturation. The country now faces a surge in capital flight and needs a “dramatically lower” currency. In their view, this next leg of the rolling global drama is likely to play out fast and furiously.
“We are deeply sceptical of the consensus that the authorities can ‘buy time’ by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts and easing in fiscal policy,” it said.
Is RBS right to forecast doom and gloom for the global economy?
... “Sure, the economic indicators point to things being not so good. For instance, a sharp slowdown in China is not good for the UK, the US or Europe, because it puts a drag on growth. In that sense the impact is significant. However, it is not a disaster.
“But if the current concerns turn into systemic meltdown on financial markets, then all bets are off.”
“The worry is that this will become a self-fulfilling prophecy as investors rush to the exit doors and businesses and households stop spending and, if a financial market rout feeds through to a new recession, policymakers are seriously lacking in tools to fight the new downturn.”
Monty Python - "Run Away! Run Away!
