Well, there have now been nearly 15 trading days since RBS advised its clients to brace themselves for a “cataclysmic year” that includes a global deflationary crisis and a further 20% fall for major stock markets. Oh, and oil may plummet to $16 a barrel!
Part of the rationale for the gloomy prediction came from the bank’s credit team who reckon that markets are flashing similar stress alerts to the turbulent months before the Lehman crisis in 2008.
Armed with this and other supporting data, clients have been advised to sell everything except high quality bonds, on the basis that this investing game is about return of capital, not return on capital. To be fair, they’re correct when they say that in a crowded hall, exit doors are small. In other words, it’s difficult to sell in a market panic.
Should we follow the bank’s lead?
As a ‘bottom up’ investor, I tend to focus more on companies rather than macro worries. Indeed, I suspect that I wouldn’t have invested at all had I spent all day listening to the financial press, which has reported on the ills of the global economy, Europe, China, and the oil price decline for some time now.
However, when institutions announce a real step-change in their thinking, which is supported by research, then I think that it pays to take the time to try and understand why the analysts have changed tack.
There’s no doubt about it, as evidenced by the chart below, the FTSE 100 has pretty much been on a down trend since hitting 7,000 in April last year. Just last week the index officially entered bear market territory, and although there have been some recoveries, they don’t appear to have lasted so far.
Indeed, as I type the FTSE 100 is on the up driven by the Bank of Japan’s surprise move of negative interest rates. It acted in an attempt to combat the extremely low levels of inflation and growth in the country, the latest decline in commodity prices and the added deflationary pressures that the stronger yen could bring.
Perfect storm or a storm in a teacup?
There’s no doubt about it, as evidenced by the 10-year chart, if a number of factors come together, they can form a perfect storm – just look at the sell-off when the financial crisis hit home with investors. Today we have a number of factors causing concern:
- Worries about growth in China
- Investors are concerned about the low oil price
- Some companies have referenced reduced confidence due to the uncertainty surrounding the UK’s membership of the EU
- Some think that growth in the UK and the US is beginning to stall
- There are again whispers about another debt burden rearing its ugly head again
- Just yesterday, the Chancellor postponed the promised sale of the government’s remaining shares in Lloyds Banking Group.
All that said, I suspect there will be more volatility to come. As investors we need to cut through the noise and continue to pick good quality companies, which we may well be able to grab at bargain prices as some investors panic and sell.
