 "Sell everything, says RBS. Should you?")
Every once in a while a headline grabbing report by a broking firm sets the cat among the pigeons and ruffles global markets. It’s not surprising that such reports appear during times of high volatility.
A report by Royal Bank of Scotland (RBS) has attracted market attention. RBS has asked clients to ‘keep calm and sell everything’. They have advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.
The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman crisis in 2008. “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it said in a client note.
Shankar Sharma of First Global in an interview with CNBC had also aired similar views when he said that January 2016 looks very much like January 2008.
Market analysts are getting perturbed with the current spurt volatility which has dual epicentres. One is the way in which China has handled its finances and second is the panic in the oil market.
China is fast running out of options to control its economy. Six interest rate reductions since November 2014 bringing its rate to record lows, devaluing its currency, increasing bank lending and trying to harness the markets have all failed.
With China contributing about one-third to half of global growth annually, a deceleration in Chinese demand hurts the 40 or so countries that count China as their biggest export customer, says Satyajit Das in his column. He adds that Chinese economic managers are also finding it difficult to shift towards domestic consumption as a new source of growth.
RBS in its reports has also pointed out the sharp decline in global trade as one of the reason for its pessimism. China has set off a major correction and it is going to snowball. Andrew Roberts, the bank’s research chief of European economics and rates said, “Equities and credit have become very dangerous, and we have hardly even begun to retrace the 'Goldilocks’ love-in' of the last two years.” Roberts expects Wall Street and European stocks to fall by 10 per cent to 20 per cent, with even a deeper slide for the FTSE 100 given its high weighting of energy and commodities companies.
RBS says that Brent oil can reach $16 levels based on technical analysis. The level of $16 was last seen in 1999 in the midst of East Asian crisis. This figure is lower than Morgan Stanley’s target of $20 per barrel. RBS pointed out that a paralysed OPEC seems incapable of responding to a deepening slowdown in Asia, now the swing region for global oil demand.
Other broking firms have also turned negative, though none have stuck their neck out by saying “sell everything.” UBS issued what it called a significant change to its house view late last week, saying policy chaos in China had unsettled markets. It cut exposure to equities from overweight to neutral on a “six-month tactical horizon”. It went underweight emerging markets.
UBS says it is a precautionary move, insisting that the current global credit cycle has not yet peaked. Low oil prices should ultimately feed through to higher consumer spending and boost growth.
There are however, some analysts who have not lost hope. Bank of America said panic selling had triggered its “contrarian buy signal”, since 88 per cent of global equity indexes are now trading below their 200-day and 50-day moving averages. But there are few buy calls coming out in the market.
Normally when markets turn, analyst consensus is all aligned. Tops are made when we see every analyst coming out with a buy call. Similarly bottoms are made when everyone is advocating sell. In the present scenario, there are still some analysts who are giving buy calls, indicating that the market bottom is sometime away.
While RBS and other broking firms are basing their recommendations on global event, India story is largely about domestic growth. Though markets would be affected by outflow of money, relatively India is well placed as compared to other economies globally. Though a slowing China impacts exports, lower oil prices is a big plus.
Motilal Oswal in a recent strategy report said that the silver lining is that 2016 can see some revival in consumption. Major drivers of consumption both in rural and urban areas - Pay Commission can boost GDP by 1.5% for FY17; Rural allocations from the budget is likely to see an increase; DBT being implemented is leading to higher discretionary spending; raw material cost benefits by user industries will lead to benefits for consumers also; and India hasn't seen 3 consecutive years of droughts, rising probability of La Nina. Motilal Oswal is overweight on stocks that will benefit from the revival in consumer demand across product categories.
