Last week RBS made headlines around the world when one of its analyst’s advised clients to sell completely out of the market due to their forecast that global stock markets were headed for a very, very torrid year in 2016.
Of course, it has already been a very tough start to the year with the oil price falling more than 21.05 per cent pulling down global equity indices as Chinese growth has slowed to a 25 year low with some of this coming in the days since the note.
According to FE Analytics, the FTSE 100 has fallen 7.39 per cent in 2016 although these figure do not include a rally in today’s trading – while emerging markets have seen an even sharper fall.
Performance of indices in 2016
Source: FE Analytics
Bears, such as the RBS broker, advocate moving into cash so as to protect against further falls as well as keeping ‘powder dry’ in order to take advantage by buying back in at cheaper valuations such was the case over the massive period of downside seen in the financial crisis.
While a 2008-stye meltdown of the same magnitude that markets saw massive falls of up to 45 per cent is not out of the question, Jim Wood-Smith head of research at Hawksmoor points out that it is not very likely.
“Could they be right? Yes of course they could. A repeat of the great financial crisis is not a zero per cent probability. But neither is it 50 per cent. Or even 25 per cent.”
“The equity bear market is now about 10 months old and is picking up speed. The good news is that the faster prices drop, the quicker it is all going to be over and done with.”
The total falls for markets are over 11 per cent from the point of view of price for global stocks since their peak, with the FTSE 100 not far off 20 per cent.
Performance of indices since April 2015
Source: FE Analytics
It is likely this trend will continue, according to Wood-Smith, due to low sentiment but there is little to point to a full on market crash.
“The faster everything goes down the gloomier everyone gets and becomes more and more convinced that the world is coming to an end,” he said.
“This is the way of bear markets. Last week’s American economic data was pretty poor, especially the manufacturing numbers.”
“The dollar is soaring, commodities and emerging market currencies are plummeting like a sheep from a tree. The Fed’s worthy mission to wean the world off its addiction to debt is already proving uncomfortable and destabilising. The bear is not going away just yet.”
Performance of dollar versus sterling over 2yrs
Source: FE Analytics
AXA Investment Managers chief investment officer for fixed income, Chris Iggo, says the heightened bearishness is throwing up opportunities as more fear a recession.
“The lessons of 2008 and 2012 were to seek the value opportunity. It was to identify where credit spreads were too wide or where the system would not let a company or country go bust. Money was made in the recovery. It will be again,” he said.
“I doubt all mining companies are going bust. There are distressed assets that will recover,” he added.
In addition he says there are parts of the economy that should benefit from the very low ongoing oil price that is not taken into account by a bearish viewpoint.
“The bears always argue that higher oil prices are a tax on growth but they've been very quiet about the massive tax cut that all global energy consumers have experienced over the last year or so.”
“Is it better that economic rent from high oil prices benefits a few producers than the bigger and broader number of economic agents that benefit from lower energy costs and, by extension, more disposable income?”
“If consumers are spending hundreds of dollars less on gasoline imagine how tempted they might be to buy the iPhone 7.”
The sentiment is echoed by M&G’s Richard Woolnough manager of the £16bn M&G Optimal Income and $4bn M&G Strategic Corporate Bond funds.
“The economic reality is that falling oil prices help the economy, falling commodity prices are a supply rather than a demand issue, the Chinese economy is not a significant input into the US economy, and interest rates and Fed policy remain exceptionally accommodative.”
He adds that the US economy, as evidenced by its industrial production and labour market, is looking strong, pointing to an unlikely chance of a recession.
“If the outlook from an economic and industrial output perspective were grim then companies would be shedding labour in the most traditional manner, by firing people.”