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1 February 2016 Edition

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Finance in trouble again?

• The Government is moving to protect the powerful and well-connected

What is it that has one of the largest banks in Britain telling its client base to engage in the financial equivalent of stocking up on tinned food and heading for the hills?

THE rates research team at the Royal Bank of Scotland issued an investment note to their clients on 8 January 2016 that contained a simple if somewhat stark message. It ran to 55 pages but can be summed up in three simple words: get out now.

 “We have been warning in past weeklies that this all looks similar to 2008,” they said. “Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”

The time to bail, it seems, has arrived.

So what is it that has one of the largest banks in Britain telling its client base to engage in the financial equivalent of stocking up on tinned food and heading for the hills? 

It’s not like the financial sector has a great track record when it comes to predictions, so could this just be panic and speculation?  

The financial world wants to put its capital where it can get the highest return at the lowest acceptable risk to itself. This is the issue that underpins the Royal Bank of Scotland report and the mainstream media discussions on oil price, interest rates and deflation.

The three main investment areas that have benefited from the ultra-low rates have been emerging markets, credit and stocks. The problems raised are that there are strong fears of a significant downturn in China, share price indexes are falling, and credit markets that have been kept going through central bank low interest rates are beginning to slightly buckle under pressure with the announcements of a rate hike in the United States.

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• China is the world's second-largest economy

The bottom line is that finance has been chasing returns, once again, through ultra-cheap credit. There has been an over-reliance on consumption-led growth. We have not seen investment in actual long-term productive activity to the extent that is needed. The European Central Bank’s bond-buying policy has led to a significant fall in the cost of Irish debt but this is outside of Irish Government control and influence, as is the growing concerns in the international financial markets.

So is the Royal Bank of Scotland justified to make such a dramatic “sell” call?  

It seems that, all hyperbole aside, we may be in for something of a bumpy ride this year. The real concern is that the present government, if returned, will move to protect the powerful and well-connected when it happens, leaving the rest of us to deal with the consequences as before.

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