Investing During a Global Downturn

William H. Witherell, Ph.D.
Fri Jan 27, 2023

International institutions, including the International Monetary Fund, the World Bank, and the OECD, have all warned of a downturn in the global economy commencing in the fourth quarter of last year and continuing in the early months of 2023. The numerous factors underlying these projections included the ongoing war between Ukraine and Russia and its effects on energy markets, soaring inflation, and the central banks’ tightening of monetary conditions, along with a significant slowdown of the Chinese economy due in large part to outbreaks of Covid and the government’s restrictive policy response.


Investing During a Global Downturn by  William H. Witherell, Ph.D. Vice Chairman & Chief Global Economist


All this would appear to imply a negative environment for stocks. However, global equity markets have demonstrated considerable strength thus far in January, with the global iShares MSCI All Countries ETF, ACWI, up 6% year-to-date January 23rd. International equity markets are outperforming the US market, with the iShares MSCI EAFE ETF, EFA, which covers all advanced economies outside of North America, advancing 7% and the iShares MSCI Emerging Markets ETF, EEM, gaining 10.5%. There are several reasons for investors to be viewing international equity markets with increased optimism during a forecast downturn.

The fourth quarter of 2022 was indeed weak, according to the data now available. It may well prove to have been the weakest quarter-on-quarter growth for world GDP, with growth improving in the current quarter and projected to do so in the further quarters of 2023. In other words, the global economic slump is now looking more shallow and brief than earlier feared. An important reason for the improved outlook is the apparent speed with which the Chinese economy, the second largest in world, is “reopening.” The Chinese government made a policy pivot to growth in November. Of even greater importance, in December, without advance notice, China lifted its restrictive zero Covid policy, leading in short order to hundreds of millions becoming infected, medical facilities being overwhelmed, and many of the unvaccinated elderly dying. There was an almost immediate negative effect on the economy, with factories and stores lacking both workers and customers. However, the surge in new infections appears to have peaked in late December, at least in urban areas; and factories and stores are becoming full again. Indicators of mobility have recovered rapidly.

The Chinese government is using its ample resources to stimulate the economy, including beginning to bail out the real estate sector, where construction is now resuming. The restrictive regulatory attitude towards business, particularly the tech sector, has softened and become more supportive. The growth outlook for China’s economy has become notably brighter, with the government target of 5.5% growth for the year looking increasingly feasible. This improving outlook has lifted not only Chinese equities but broader risk sentiment as well. The SPDR S&P China ETF, GXC, is up 14% so far in January. Over the past three months, that ETF has gained some 44%, which brings the price approaching 70% of its 2021 high. Markets have moved quickly to reprice Chinese assets, but further gains in equity prices are likely to follow increased earnings estimates. While future Covid outbreaks remain a risk, with large parts of the population not fully vaccinated, immunity to severe illness from Covid most likely has increased due to the large number who have survived the disease.

The reopening of the Chinese economy is of great importance to other economies. The shares of global manufacturing output accounted for by the US, Germany, and Japan combined is less than that of China. Despite some relocations of production to other countries like India and Vietnam, China continues to play a very important part in supply chains essential to firms around the globe. It is also a key market for the raw materials and commodity exports of many countries. Emerging-market economies, particularly those in the Asia Pacific region, appear likely to benefit greatly from the reopening of the Chinese economy. The Korean economy, for example, looks well placed to grow, a prospect reflected in the 7.1% gain this month in Korean stocks as measured by the KOSPI Index. The advanced economies in the region also have improved economic prospects. Australia’s exports of energy and other commodities, along with consumer goods, should prosper. Australia’s flash PMI (Purchasing Managers’ Index) for January, at 48.2, is still negative but is the first improvement since September. Australian stocks are catching the China reopening wind, with the S&P ASX 200 Index up 6.4 so far this year. Japan’s flash PMI for January, at 50.8, is in positive territory and the highest reading since October. While China’s reopening will be a strong positive factor for many Japanese firms, the effects on energy markets will be an offsetting negative concern. The Nikkei 200 Index is up 4.6%.

The improved prospects for the global economy are evident in the flash PMI for the Eurozone for January, which improved, moving above the 50 or neutral mark to 50.2. This is the first positive reading since June 2022. The services PMI was in positive territory at 50.7. While the manufacturing PMI was still in negative territory at 48.8, that is the highest reading in five months. Supply bottlenecks are easing, and employment rose at the fastest pace in three months. Business expectations have recovered. These readings will add to the growing optimism that the economic recession that had looked unavoidable for the eurozone may not occur. The less-harsh-than-feared winter weather so far, increased energy savings, and a moderation in inflation, together with the implications of the rapid reopening of China, are reasons to expect that any recession in Europe will be shallow and brief. The main downside risks are the war in Ukraine and the weather.

Investors are returning to European equity markets. The iShares MSCI Eurozone ETF, EZU, has gained 10.7% year-to-date, with Germany up almost 12%. Across the channel there is less reason for optimism as the flash PMI for the UK in January continued negative and fell at a sharper pace than in December. Business conditions are reported to remain tough. Nevertheless, businesses indicated that they, too, are optimistic that a turnaround in global economic conditions and some easing in inflation will improve their prospects going forward. The FTSE 100 is up 4.1% thus far in January.

Looking forward, 2023 could be the first year in a long time that international equities outperform domestic US equities. Investor risk sentiment with respect to both advanced and emerging-market assets has strengthened while the US dollar has weakened somewhat. The risk of financial-market stress has eased as economies in Europe and Asia have demonstrated increased resilience. Consistently declining leading indicators for the US economy continue to point to a mild recession beginning in the second quarter. Historically, US equities tend to bottom during recessions. Uncertainty about the course and eventual end of the Federal Reserve’s credit-tightening cycle clouds the outlook for investors. The Ukraine-Russia war is the other major source of uncertainty for both the global economy and markets. Close monitoring of developments is essential.

None of the securities mentioned in this note are in the current investments of Cumberland Advisors or the author.


William H. Witherell, Ph.D.
Vice Chairman & Chief Global Economist
Email | Bio


Sources: Financial Times, Oxford Economics, Goldman Sachs Economics Research, S&P Global PMI,, Bloomberg.

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