RBS tells its clients to “sell everything”

According to an RBS client note, the prospects for the global economy and world markets in 2016 are dire

According to RBS, 2016 is going to be a difficult year for global markets 

The world economy is set for a cataclysmic year in 2016, with a global deflationary crisis on the table, according to Andrew Roberts, Research Chief for European Economics and Rates at RBS. In a note written to its clients, RBS warned that the best course of action was to “sell everything”, except for high-quality government bonds.

The note prophesised a number of flash points that could take place in 2016 across the global economy, including major stock markets plummeting by a fifth of their value, and the price of oil falling well below $20 per barrel.

Roberts’ pessimistic outlook for 2016 follows on from a similarly bearish projection for the year ahead, made in late 2015.

According to Roberts, following the 2008 financial crisis, Asia took up the role of driver of economic growth. However, this growth was largely driven by debt. The limits of debt build-up have now reached a climax, resulting in negative growth for both world trade and world credit. With no regions able to pick up the role of driver for the world economy, Asia will no longer be able to drive forward the world’s economic growth.

According to Ambrose Evans-Pritchard, writing in The Telegraph, Roberts sees China as the “epicentre of global stress, where debt-driven expansion has reached saturation. The country now faces a surge in capital flight and needs a ‘dramatically lower’ currency. In [RBS’s] view, this next leg of the rolling global drama is likely to play out fast and furiously”.

The RBS client note stated, “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.”

As a result of this pessimistic economic outlook, Roberts is warning clients to “sell everything”, with few exceptions. He informed clients that RBS is cynical about the performance of “mostly everything”, except for “high-quality, five-to-10-year government bonds”. He also warned clients that they should “stay short all commodities. Yes, especially oil”. Ominously, the note said that “this is about return of capital, not return on capital. In a crowded hall, exit doors are small”.

Not everyone, however, is convinced of such doom and gloom: Australian economist Stephen Koukoulas has cast doubt on the RBS note, confident that markets and global economic conditions will fare better in 2016. Writing on his website, Koukoulas lists 11 variables, including Chinese, Brazilian, Japanese and US stock prices, US house prices, and the price of copper and oil. According to Koukoulas, Roberts claims that each of these should be sold.
Challenging RBS’ dire prognosis, the Australian economist has offered Roberts a bet of $10,000 based on whether 2016 will end with six of the 11 variables at a lower number or not.