“Sell (mostly) everything.”
It’s the advice from the Royal Bank of Scotland bouncing around the world.
“Sell everything except high quality bonds,” is the advice in a note to clients in the RBS European Rates Weekly newsletter.
“Danger is lurking out there for every investor.”
Here’s a run down on the thinking of analyst Andrew Roberts whose note to clients created the “Sell Everything” headlines round the world.
In comment under the title “The bears have killed Goldilocks”, Roberts writes:
There is a difference between forecasting something and it actually crystallising. We think investors should be afraid that the ominous outlook for the world in our Year Ahead has been borne out (ex-ECB cuts) over the past six weeks. This hardens our ‘anti-goldilocks’ and deflationist views. Rather than fade, we say follow — and be cautious in 2016. We have been warning in past weeklies that this all looks similar to 2008. We dust off our old mantra: this is about ‘return of capital, not return on capital’. We suspect 2016 will be characterised by more focus on how the exiting occurs of positions in the 3 main asset classes that benefitted from QE (other than high quality govt FI, which is cheap): 1) EM, 2) credit, 3) equities. We stick to our -10%-20% equity downside call. In a crowded hall, exit doors are small. Risks are high.
Roberts says: “Not a rout, but worst global equity performance since 2008.”
He is bearish, and has been for some time, on China, global commodities and oil.
Since November 2014, when Roberts compiled his year ahead report, China stocks are down a 10%. “A good start to the year, more to come,” he says.
He calls China the eye of the storm. “As it stands, we have been very wary of China indeed, and deeply sceptical of the suspiciously large consensus that has thought the authorities can ‘buy time’ by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts, and easing in fiscal policy,” Roberts says.
The headlines created from the Royal Bank of Scotland analysis are feeding on fear, according to Wentworth Securities. “If your saying markets may fall by a fifth and oil will hit $16/b, it is not exactly a ‘cataclysmic’ enough to liquidate 100% of client portfolios,” Wentworth says.
Michael McCarthy, chief markets strategist at CMC Markets in Sydney, was even more scathing about the analysis.
“Putting all of your investments in one asset class is a high risk approach to investing – yet the author seems to think this is a low risk approach. The only way this is justified is if the outcome is certain – and if the described outcome is certain there’s a lot more to do than simply holding bonds,” McCarthy told Business Insider. “Naïve and sensationalist.”
Roberts believes that one of the core pillars of global growth – inflation – is unwinding. He believes global disinflation could morph into into global deflation, a scenario in which prices start falling leading to mass hoarding of money as it begins to increase in value over time.
“Negative returns in 2016 are probable, though without a recession they should be manageable,” he says. Think of falls in the region of 10% to 20%
This is why Roberts thinks the world is in trouble. Or, as he puts it: “the game is up”:
1. The baton of growth pre credit crunch was in the western world, and passed to Asia post credit crunch.
2. But this has been a debt fuelled build up.
3. We have come to the end of the willingness to build up such debt, especially as demand factors start to act against this build-up (e.g. especially demographics).
4. I showed in the Year Ahead two facts, either of which would lead a visitor from Mars to conclude, knowing nothing else, that we are in global recession:
– Negative world trade growth
– Negative world credit growth
5. This is a terrible cocktail. How consensus suggested a month ago that 2016 would be better than 2015 is a total mystery to me.
6. And there is no-one left to take up the baton of growth
Roberts says 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 realises what it needs to do (devalue soon, and sharp) and the US then, against ALL THIS countervailing pressure, then stokes the fire by hiking rates,” he says.
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