The Royal Bank of Scotland has advised clients to brace for a cataclysmic year and a global deflationary crisis.
It has given a warning that it thinks major stock markets will fall by a fifth and oil may plummet to $16 a barrel. It advises to sell everything except high quality bonds with a warning global debt has now reached record highs and this level of borrowing could spark a crisis in financial markets. It points to China which has suffered a correction to pass on their bad news, with the rest of the world suffering from this snowball effect.
Other commentators are worried about Europe with particular concerns about the European financial powerhouse, Germany. They point to Germany having static industrial production with confidence being low.
Also they consider the crisis at VW with regards to emissions, pointing out how huge the company is in Germany, with 270,000 people being employed in its home country and even more working for suppliers. It has been estimated one in six jobs in Germany depend on the car industry as well as 17 per cent of the country’s exports. So if we add in the turmoil which could be caused by Britain possibly exiting Europe, border problems and the weaker economies expecting support from Germany; China specifically, and the world in general do not appear to be heading for a good year.
I believe markets are notoriously difficult to predict and am not disputing that this year, along with many recent years, will be challenging, but I believe they could be over estimating the impact that a slowing China will have on the rest of the world. There are plenty of other developing countries which could pick up the baton from China and help to bridge the gap. With regards to the developed economies, the US does appear to be looking forward to a decent year having had the confidence to raise interest rates on the back of a strong economy, with the UK also looking better than for some time.
However, the worry is markets often run on sentiment and if the pessimists start to get traction, we will start to get to a self-fulfilling prophecy as investors rush to the exit door.
I think at this time it is worthwhile remembering one of Sir John Templeton’s maxims, that the time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.