Doomsday scene
The doomsday scenario, described in a note the bank sent to his clients on 8 January, was somewhat echoed by two other major lendersiStock

Royal Bank of Scotland (RBS) has warned its clients that 2016 could be a "cataclysmic year", going as far as predicting stock values could fall by a fifth and oil prices could plunge to $16 (£11, €15) a barrel, even though crude has not dropped below the $30 threshold for 12 years.

The doomsday scenario, described in a note the bank sent to its clients on 8 January, was somewhat echoed by two other major lenders, with Morgan Stanley saying the price of oil could fall below $20 a barrel, while UBS warned of a "significant change" in the markets.

Citing the chaos that has gripped Chinese markets in the first trading days of 2016, the bank reduced its rating on exposure to equities from "overweight" to "neutral" on a "six-month tactical horizon", while it downgraded the prospects of emerging markets to "underweight".

UBS added the global credit cycle had not yet reached its peak and lower oil prices would ultimately translate into higher consumer spending, which would in turn boost global economic growth.

Meanwhile, RBS said in its note that the current stress levels in the markets were comparable to to those registered in the months immediately prior the 2008 crisis. "Sell everything except high quality bonds," the bank's credit team said. "This is about return of capital, not return on capital. In a crowded hall, exit doors are small."

With global debt ratios at previously unseen levels and global trade and loans on a downward curve, there was little for equity markets to be optimistic about over the next 12 months, the bank added.

"China has set off a major correction and it is going to snowball," said Andrew Roberts, RBS research chief for European economics and rates. "Equities and credit have become very dangerous, and we have hardly even begun to retrace the 'Goldlocks love-in' of the last two years."

Roberts added European stocks and Wall Street could face a drop between 10% and 20%, while things could get even worse for the FTSE, given the index's exposure to commodities-related stocks and energy companies.

"London is vulnerable to a negative shock," he said. "All these people who are 'long' oil and mining companies thinking that the dividends are safe are going to discover that they're not at all safe."

A sharp slowdown in Asia, now the key region in terms of global oil demand, and OPEC's inability to take drastic actions to halt the current trend will conjure in dragging the oil prices through the floor, the bank said.

RBS identified China as the epicentre of the global crisis, highlighting the world's second-largest economy was in desperate need of a "dramatically lower" currency, in a bid to stem to ongoing capital flight.

"We are deeply sceptical of the consensus that the authorities can 'buy time' by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts and easing in fiscal policy," the note said.

Across the Pacific, the US Federal Reserve has been guilty of "playing with fire", according to the bank, which added the US central bank could be force to take the almost unprecedented step of cutting interest rates only a few months after raising them for the first time in almost a decade.

RBS, which estimates the world's largest economy slowed down to grow only 0.5% in the fourth quarter, said it was very unusual for the Federal Reserve to raise interest rates even though the country's GDP has been on a downward trend since 2014. "There has already been severe monetary tightening in the US from the rising dollar," the bank said.

RBS said the forecast might still turn to be inaccurate but warned investors of the predictions it made in November 2015, which it first issued over the outlook of the global markets during that month.

"There is a difference between forecasting something and it actually crystallising," the bank said. "We think investors should be afraid that the ominous outlook for the world in our Year Ahead has been borne out [ex-ECB cuts] over the past six weeks. This hardens our 'anti-goldilocks' and deflationist views."

IBTimes UK has contacted RBS for a comment and is awaiting a reply.