Should you sell everything including shares now?

UK investment bank RBS has told its clients to brace for a ‘cataclysmic year’, warning that major share markets could fall by 20% and oil may sink to just US$16 a barrel.

RBS’s credit team said global markets are flashing stress alerts similar to the volatile months before the Lehman banking crisis in 2008 which led to the global financial crisis (GFC).

In a note to clients, RBS wrote, “Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small“.

RBS’s credit chief Andrew Roberts also added, “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 past two years“.

Mr Roberts says he expects European and US shares to fall by 10% to 20%, with an even deeper slide for the UK’s FTSE 100, given its high weighting to energy and commodities companies.

In an ominous warning for companies in those sectors paying high dividend yields including the likes of BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Woodside Petroleum Limited (ASX: WPL), Mr Roberts says, “All those people long oil and mining companies thinking the dividends are safe are going to discover that they’re not at all safe”. The three companies above boast trailing dividend yields of 11.1%, 7.6% and 10.2% respectively, but will more than likely be forced to cut their dividends in the wake of falling commodity prices.

Another investment bank, JP Morgan has told clients to ‘use any bounce as a selling opportunity’. JP Morgan’s equity strategist, Mislav Majetka said, “Our view is that the risk-reward for equities has worsened materially. In contrast to the past seven years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally.

Is it that bad?

The bears are definitely in control of the markets at the moment, but the views expressed by the analysts above may prove to be wrong. Falling oil prices should see higher consumer spending and provide a boost to growth. Central banks may also come to the rescue, lowering interest rates yet again – which usually has the effect of boosting growth.

On the other hand, volatile and falling markets make investors less confident and they can turn from optimists to pessimists in short order. That could see consumers decide to keep their hands in their pockets rather than spend their hard earned.

Foolish takeaway

The depths of the GFC (March 2009) proved to be one of the best times in recent history to buy shares in high-quality companies as markets plunged. If the analysts’ views above are right, investors could see the ASX littered with bargains giving long-term, Foolish investors the opportunity to stuff their portfolios with a bunch of cheap, high-quality shares. Bring it on.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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