Emotions play an important role in the market. Experienced traders, analysts, economists, and strategists do their best to denude themselves of their emotions when they are making trading decisions or recommendations.
That way they won’t be influenced by the peaks of euphoria and depths of despair that so often drive the ebb and flow of markets.
So when a major global bank, such as RBS, advises clients that they should “sell everything” investors had better take notice.
Writing in the UK Telegraph today Ambrose Evans-Pritchard says Andrew Roberts, and the interest rate strategy team at RBS, has advised clients 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.”
That follows on from an incredibly bearish outlook for 2016 that Roberts’ team issued late last year.
At the time Roberts said there are “a number of bad headwinds affecting the world right now, which will worsen in 2016” and that this means RBS is wary of “mostly everything except high-quality 5-10y govt bonds,”
It’s easier to ask what markets and assets Roberts is not bearish on. But some of the highlights include a negative outlook for commodities, with RBS advising clients to “stay short all commodities. Yes, especially oil.”
Roberts is also bearish stocks saying “negative returns in 2016 are probable, though without a recession they should be manageable, think -10-20%, rather than a rout.”
No rout. That’s the good news.
But as a recommendation that stocks will fall, that investors should stay short commodities, and that in a global universe of available trades only buying bonds looks attractive suggests another tough year ahead for investors.
Part of Roberts’ original thesis was that there has been a dangerous build up of debt globally. Think the run up to the sub-prime crisis and the credit crunch that followed.
China is a big part of this Roberts says and, as a consequence is at the top his list of themes for 2016.
China, “has very high debt levels (as a % of GDP) given they are still emerging” and crucially they have accumulated this debt incredibly fast, he wrote.
Key here is not just the size of the debt pile, the “level” in Roberts term but a recognition that the faster the debt has been accumulated “the less the probability that it is in safe, ultra long-term, hands.”
Roberts says China is “only” the third greatest debt bubble build up in the last 25 years. But it remains a clear and present danger to markets and the global economy because like Thailand, just prior to the Asian crisis, and Ireland in the run-up to the sub-prime crisis, these episodes ended badly in every single case.
Roberts goes further noting that:
We can make a very strong conclusion that this build-up has occurred very fast, and as such makes China even more vulnerable to the slowdown as it occurs.
It is now happening — with obvious knock-on to the rest of EM.
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.
Worryingly Roberts adds that, “the downside risks may still be being underplayed.”
If that’s the case, and if China continues to roil markets as it has so far in 2016, comments made by Dennis Lockhart, Atlanta Fed governor, in a speech last night will be important for markets as the year progresses.
Lockhart said “if the volatility continues for several weeks, I may have to revise my view that I don’t now see a connection between financial markets abroad and the real economy.”
That could change expectations about the path of Fed interest rates which might mitigate some of Roberts’ downside risks.
But nothing is going to drag oil back from the abyss. Roberts said oil was the only major concern with the potential to knock China off the number one spot for 2016.
His outlook is hugely bearish and he says:
We will now make that three in a row for bearish oil Year Aheads. All the reasons (demand, supply, stocks, Iran, El Nino), line up in the same very powerful direction. We are moving in a short-term $26 target and once reached down to $16. Our forecasts are for this to occur through 2016, but the risk is it occurs in Q1 as global oil demand drops off according to IEA forecasts and the world runs out of ships to store it in.
Debt, China, and collapsing oil are the primary themes for 2016, as well as stocks to fall and bonds to rally. But there are plenty more moving parts that Roberts and his team are worried about.
Here’s the RBS bullet point list of all their concerns for the year ahead.
My bullet point themes into 2016 are (remain):
- Bearish China
- Bearish global commodities (hards, softs, fluids). And more specifically . . .
- Bearish oil (target $26, then clear risk of $16)
- CBs (mostly everywhere) will ease more
The world has far too much debt to be able to grow well — global output
- Emerging market majors (outside India & Eastern Europe) all remain sells
- Automation on its way to destroy 30-50% of all jobs in developed world
- Currency war / mercantilism
And my new bullet point themes:
- Global disinflation risks turning into global deflation in 2016
- Everyone thinks ‘goldilocks’. We thought this strongly for >2 years (on our liquidity theme) but now worry about equities/credit, both huge, multi-year, well held positions. Negative returns in 2016 are probable, though without a recession they should be manageable, think -10-20%, rather than a rout
- If we see weaker ‘risk on’ products, the last safe ‘high yielder’ is the EMU periphery. Our new 0.75% 10y BTP target could prove too high a yield
- Risks to 0.16% new 10y bund target are on the downside, not upside
- Main risk comes from oil. A plunge sub $20 would aid consumption
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