Wednesday, January 13, 2016
RBS is telling traders to 'sell everything'
RBS has advised traders to "sell everything" in an alarming research note that warns of a global deflationary crisis.
That would mean prices start to decline, creating a vicious cycle where people hang onto their money rather than invest it in the economy.
“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 said in a note to clients.
RBS said that major stock markets could fall by a fifth and that oil may plummet to $16 a barrel.
Oil flirted with $30 a barrel on Tuesday in lows not seen for over a decade. Morgan Stanley, the American investment bank, said that Brent would slide further to $20 a barrel on currency alone, because the dollar is gaining in value, and oil is valued in dollars.
Oil has already lost 11 per cent of its value so far this year.
A surge in supermarket shares, powered by better than expected Christmas trading results at Morrisons, helped the FTSE 100 index of the 100 biggest companies listed on the London Stock Exchange to make gains on Tuesday morning.
But the FTSE 100 is still suffering its worse start to the year in four decades.
Sharon Bell, a Goldman Sachs European equities strategist, told the BBC that European stocks were so cheap that they were an attractive buy for medium term investors, proving it's not all sell, sell, sell.
"You're looking at a dividend yield on the FTSE 100 of 4 per cent. I think some of that yield is vulnerable, particularly because of a lot of it is paid for by commodities companies but even on the FTSE 250, being a mid-cap index with more UK exposure, there's a dividend yield of 2.5-3 per cent. I think it's looking reasonable," Bell said.
Chinese deflationary fears are weighing on investor sentiment. Trading of Chinese shares was halted twice last week when an automatic circuit breaker kicked in following losses of 7 per cent. China then removed the circuit breaker over fears it was making the situation worse.
China shares suffered another brutal start to the week on Monday, dropping a further 5 per cent.
RBS said that China was at the centre of global stress. “As China slows, as it now is doing now that the credit binge comes home to roost, it is taking the world with it. This is your number one theme for 2016, without any question in my mind,” Andrew Roberts, part of the interest rate team at RBS, said in the note.
Roberts' team first warned about another slowdown in November. It said the US Federal Reserve's decision to raise interest rates had hastened the decline.
Paras Anand, head of European equities at Fidelity International, told the BBC that the RBS note was worrying but symptomatic of a broader shift to pessimism.
"It's probably an extreme version of a view that's starting to form around the idea that we're in an environment of secular stagnation, so low growth, low prices, deflationary environment and I feel that's where consensus is moving to. My perspective would be that risks being far too pessimistic," Anand said.