According to market commentary by the British banking giant, the Royal Bank of Scotland (L:RBS), investors and the general public are facing a “cataclysmic year.”
In a note to investors, RBS said “Sell everything except high-quality bonds. This is about the return of capital, not return on capital. In a crowded hall, exit doors are small.”
RBS pointed to the crisis in China as a catalyst that would lead to the world economy shuddering into a grinding halt. The parallel to events of 2008 which led to the once-mighty Lehman Brothers falling into bankruptcy is a scenario that is worrying to say the least.
Following the events of 2008, central banks across the globe implemented massive stimulus programmes in the form of quantitative easing. These programmes were combined with structural reform and belt-tightening which in the case of periphery Eurozone economies was administered with considerable hardship for these countries citizens.
Is it really the case that after all these sacrifices, that according to RBS, that 2016 will be a year that brings us back to ground zero?
The stock market falls in China has been accompanied with declines in Europe, the USA and Asia. The major US indices of the Dow 30, S&P 500 and NASDAQ are in bear territory.
Equity markets have risen off the back of cheap credit. Although these days are not exactly over with interest rates still being substantially low, the support that was offered has been withdrawn when the US FOMC increased interest rates by 25 basis points in December. The Federal Reserve, according to its dot plot is planning to hike interest rates a further four times during 2016.
In the commodity space, the price of crude continues to tumble and these falls could increase as Iranian production is ramped up. With Saudi Arabia and Iran now at loggerheads, over geopolitical tensions stemming from competing interests in Iraq, Syria and Yemen, it is hard to see how these two Persian Gulf giants will be able to negotiate an agreement to limit production at the next OPEC gathering.
According to Andrew Roberts, who RBS credit chief, U.S and European equities are in line for a 10% to 20% correction. This gloomy prediction follows on from Morgan Stanley’s call for oil to reach US$20 per barrel. Standard Chartered (L:STAN) was, even more, negative on oil when it forecast crude hitting US$10 per barrel.
If investment banks are correct, the old adage of “sell in May and go away” has been replaced by “sell now and go on holiday.”
The picture that we are now seeing on the equity front is not very encouraging. Global indices do look like a sell-side bet. The investment bankers could be right. Growth in the global economy could hit the buffers and the China credit bubble could burst. There is enough geopolitical risk and bad news to make most us switch off our flat screen televisions when the nightly bulletin is about to begin.
Invariably, most of the times, investment bankers get it wrong. RBS is correct to highlight the concerns. However, it is still rather difficult to assess the impact that a slowdown in China will have on the global economy. It should be remembered that the Chinese economy in relative terms opened up only recently to the outside world.
The problem with notes such as the one made by RBS is that if you look hard enough, you will find signs that point to an impending crash in the global economy. On the flip side, the same can be true if you look for signs that the global economy is going to expand.
However, the fear is that such pessimistic outlooks that are promoted by investment banks could create a surge in negative sentiment and a self-fulfilling prophecy.