RBS Warns: Sell Everything

The Wall Street Journal

RBS economists have urged investors to sell everything except high-quality bonds, warning of a “fairly cataclysmic year ahead.”

Writing in a client note dated Jan. 8, the bank’s European rates research team said that clients should be concentrating on return of capital, not return on capital, and that an ominous outlook to the world economy “all looks similar to 2008.”

The Key Points

The note is particularly bearish on China and global commodities, and predicts that oil could fall as low as $16 a barrel.

In a grim set of predictions, Andrew Roberts, head of European economics, rates & CEEMEA research said that the world has far too much debt to be able to grow well.

He also warned that advances in technology and automation are set to wipe out up to half of all jobs in the developed world.

The note says equities could fall 10% to 20%.

It predicts the year will be spent focusing on how to exit positions that have benefited from long-running QE, including emerging markets, credit and equities.

“The world is slowing, trade is slowing, credit is slowing, we are in a currency war, global disinflation is turning to global deflation as China finally realizes what it needs to do (devalue soon, and sharp) and the U.S. then, against ALL THIS countervailing pressure, then stokes the fire by hiking rates,” Mr. Roberts wrote.

While the Fed’s interest rate move last year suggests a positive outlook for the U.S., the ECB’s quantitative easing is having a powerful effect, and eurozone activity picked up at the end of last year, there are undeniable headwinds, not least from China, oil and commodities.

Bears Out in Force

RBS is not the first bank to kick off the year with a series of bearish predictions on the world economy:

JP Morgan on Tuesday became the third bank to push back its forecast for the timing of a Bank of England rate rise, joining Goldman Sachs and Bank of America Merrill Lynch.

Morgan Stanley wrote in a note on Monday that oil prices could fall a further 10% to 25% if the dollar continues to strengthen.

Other major banks including Bank of America Merrill Lynch, Barclays, Deutsche Bank, Societe Generale and Macquarie have also cut their oil forecasts in the past week.

Ratings agency Standard & Poor’s has more companies on a negative outlook than at any time since the financial crisis.

A survey published by M&G and YouGov on Tuesday, based on data collected in the final quarter of 2015, shows that U.K. consumer inflation expectations are at their lowest level in three years.