In 2016, investors face a “cataclysmic year” and should “sell everything” ahead of a crash where markets could plunge by up to 20 percent and oil could tumble to $16 per barrel, Royal Bank of Scotland (RBS) is warning.
In a recent note to its clients, RBS sounds the alarm and warns investors to “sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”
RBS says that the current situation is reminiscent to that of 2008, when Lehman Brothers collapsed and led to the global financial crisis. This time around, RBS says that China could be the spark of such a crisis.
So far this year, stock markets have already come under heavy pressure, as U.S. stocks suffered their worst first week of the year since records began and in the U.K. the FTSE 100 was down over than 5 percent in its worst start since 2000.
Oil prices have also continued to fall sharply on fears of lower demand amid a supply glut, and with Iran growing closer to restarting oil exports as it grows closer to having sanctions lifted, alongside concerns of slowing growth in China that could lead to a further slowdown in demand for oil.
Amid such fears, on Tuesday oil fell below $30 a barrel in New York for the first time in 12 years, as it fell to the lowest level since December 2003.
Tensions between Iran and Saudi Arabia are also complicating matters and making it less likely that OPEC will agree on cutting production in order to halt the plunge in prices.
Investors have also been spooked by fears of a slowdown in the Chinese economy alongside devaluations of the yuan which have fueled a crash in the country’s stock market leading to two days last week where stocks plunged 7 percent and trading was suspended.
“China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the ‘Goldilocks love-in’ of the last two years,” said Andrew Roberts, RBS’s credit chief.
For years global stock markets have been supported by low interest rates, Central Bank stimulus measures and quantitative easing (QE), as well as hopes of economic recovery. However with the U.S. Federal Reserve (Fed) hiking interest rates and the Bank of England expected to follow in its footsteps, that crutch in the markets is being removed.
Roberts said that European and U.S. markets could tumble by 10 to 20 percent in 2016, with the FTSE 100 particularly at risk due to the predominance of commodity firms in the index.
“London is vulnerable to a negative shock. All these people who are long [buyers of] oil and mining companies thinking that the dividends are safe are going to discover that they’re not at all safe,” he said.
“We suspect 2016 will be characterized by more focus on how the exiting occurs of positions in the three main asset classes that benefited from quantitative easing: 1) emerging markets, 2) credit, 3) equities … Risks are high,” he cautioned.