The logo of the Royal Bank of Scotland (RBS) is seen at an office building in Zurich March 27, 2015. Switzerland's Union Bancaire Privee (UBP) is buying the international business of 300-year-old British wealth manager Coutts, the latest deal by a Swiss private bank aimed at branching out from its struggling home market. The purchase of Switzerland-based Coutts International from Britain's Royal Bank of Scotland (RBS) also marks another retreat by a foreign bank from the Swiss wealth management industry amid a string of investigations into tax avoidance. Reuters/Arnd Wiegmann

The Royal Bank of Scotland sent out an alarming message to its clients saying that they should prepare for a “cataclysmic year” ahead and sell everything except high quality bond. The bank’s credit team has warned that the global economy is headed for a deflationary crisis as the stock markets are expected to fall by a fifth and oil prices to drop to US$16 (AU$23) a barrel.

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” Andrew Roberts, the RBS credit chief, said in a client note. “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 last two years."

The bank’s credit team said that the current market conditions are flashing the same red alert as during the months that led up to the Lehman crisis in 2008. The Sydney Morning Herald reported that according to Roberts, the Wall Street and the European stocks are expected to plummet by 10 to 20 percent while FTSE-100 is set for an even deeper slide due to its high weighting of energy and commodities.

He added that London is vulnerable to a negative shock and warned that the dividends from the oil and mining companies are not at all safe.

The RBS also noted the incapability of Opec to respond to the gradual slowdown in Asia, which is the swing region for global oil demand.

In November, RBS had issued a global warning, but the situations have worsened faster than expected. It said that, in the fourth quarter, the growth rate of the US economy has slowed down to 0.5 percent. It blamed the US Federal Reserve for raising the rates at this critical point.