THE world economy is set for another devastating financial crisis next year - and markets are unprepared - a top banker has warned.
Based on key indicators that have predicted previous recessions, the US will face a downturn next year, according to Bank of America-Merrill Lynch's head of US equity and quantitative strategy Savita Subramanian.
If the world's largest economy runs into trouble the rest of the globe would be dragged down as well, she said.
Worryingly, central bankers in major developed countries appear to have used almost all of the tools at their disposal in a desperate bid to try to kick-start growth.
And markets could be in for a nasty shock if a recession were to hit as they are not pricing in a downturn.
Ms Subramanian told CNBC: "We are seven years into a full-fledged, all out, central bankers doing everything they can to stimulate demand…. yet sales growth is decelerating.
"We looked at all of these indicators that have been pretty good at forecasting recessions and we extrapolated that if they follow the current trends they're on, we're going to hit a recession sometime in the second half of next year, so a recession in the next 12 months, which I don't think is discounted into the market at these levels."
She added: "There's more risk than reward at this point"
The warning comes as stock markets in Britain and the US reach towards record highs.
Ms Subramanian said: "What scares me is the market has been so fragile."
It came as Royal Bank of Scotland was warned it may have to pay out as much as $27 billion, roughly the market value of the bank, in misconduct fines and lawsuits over the next few years.
That bill represents the upper end of estimates to settle a range of claims related to RBS's alleged misconduct before and during the financial crisis, including mis-selling mortgage backed securities (MBS) in the United States.
Investor concern over RBS's outstanding legal and compliance woes increased after news last month that the DOJ is seeking up to $14 billion from Deutsche Bank for its role in the mis-selling of MBS in the run up to the financial crisis.
"The concern is that it could be another Deutsche Bank-style situation where the fines that come in are higher than the market expects," said Laith Khalaf, an analyst at Hargreaves Lansdown, Britain's largest retail stockbroker.
"Litigation is a real Sword of Damocles hanging over the bank at the moment and until that is out of the way it is very difficult to see a reason to invest in RBS."
An RBS spokeswoman declined to comment on the potential size of the legal bill.
If RBS wins the court cases and the fines are at the lower end of analyst estimates, the total would be around $5.5 billion, most of which it has set aside to cover those damages.
However, analysts say the bank could have to pay the U.S. Department of Justice as much as 9 billion pounds ($11.19 billion) in the next few months. Even the lowest estimate of 2 billion pounds ($2.49 billion) would make it largest fine in the bank's history.
