About one hundred years ago—nearly a century—the United States faced one of its most traumatic single events in its short history as a nation: the Great Stock Market Crash (of 1929). It was a turbulent time in American History and one that, at least many hope, we have learned from and can prevent from happening again.
Unfortunately, it appears, that financiers of the world may not have learned from this mistake as the Royal Bank of Scotland has just warned investors to brace for a “fairly cataclysmic year ahead.”
In fact, in a note to bank clients, the company said: “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” The words echo of the Lehman Brothers collapse of 2008 which led to a separate global financial collapse; only this time, the point of impact may be the world’s second largest financial market: China.
But it would appear to many that this announcement should come as no surprise. Stock markets over the past year have already experienced great pressure.
The FTSE 100 falling 5 percent to post its worst opening since the turn of the millennium. More importantly, perhaps, the US Dow Jones industrial average hit its lowest start in history.
In addition, oil prices have also fallen dramatically, driven by anxiety over low demand and a glut of supply and, particularly, in guidance of Iran’s expectations to start shipping again, once the sanctions are lifted.
Overall, then, investors have been fearful of a massive economic slowdown in China which, of course, will result in the value decline of the yuan. As such, RBS credit chief Andrew Roberts comments, “China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the ‘Goldilocks love-in’ of the last two years.”
Accordingly, Roberts goes on to say, “London is vulnerable to negative shock. All these people who are long [buyers of] oil and mining companies thinking that the dividends are safe as going to discover that they’re not at all safe.”
Finally, Roberts remarks that 2016 will likely be a time to focus on three main asset classes. He advises to focus on emerging markets, credit, and equity.