Introduction

China’s re-opening process, global growth scenarios, EUR/USD outlook and major sectors.

• Following the loss of strict "zero cases" epidemic control and preventive procedures, China is currently experiencing the greatest Covid-19 mass outbreak ever recorded in the nation. The tight COVID limitations are now being lifted, which is accelerating China's economic recovery. According to economists, China can quickly recover from the Covid wave and continue to expand its economy in the short run. Concerns about Global inflation may arise as a result of China's re-opening mostly through commodity prices, although we currently expect only a minimal impact.


• Consensus expectations generally point to a downturn in 2023 Global GDP growth to 2.5-3.0%, which is thought to be the recessionary threshold for the global economy. Hence, a global recession is increasing in probability, according to most institutions. For instance, as stated in the IMF's growth report, global economic growth (excluding the EU region) will fall from 3.2% in 2022 to 2.6% in 2023, then 3.1% and 3.0% in 2024 and 2025, respectively.


• The Euro/Dollar parity increased by more than 14% since September as a result of the Fed and other central banks' announcements that they would slow the rate of interest rate hikes. We believe that the potential of a brief recession in the U.S. brought on by tight monetary policies in the first half of the year may worsen risk appetite, which might lead to a decline in the Euro/Dollar parity. However, we believe that by the end of the year, global inflation and macroeconomic uncertainty may be minimized and the advantages of holding dollar may be lost.


• The expectations for the Fed to slow down the interest rate hikes by 2023 and the reopening of China positively impacted the aviation and logistics sectors as natural gas and other commodities were suppressed due to global uncertainties and recession concerns. In regard to the climate crisis, we also favor the renewable energy sector's growth potential

Executive Summary

Based on historical trends, we evaluate that there may be up to a 10-15% loss potential in the S&P-500 index from the previous lows

• The FED's monetary tightening process, the ongoing effects of the Russia/Ukraine war (on commodities, natural gas prices in particular), and the deterioration in China's economic outlook have led to a severe increase in recession expectationsin the US and the world economy recently.


• However, although institutions such as the IMF, World Bank, and OECD have pointed to increased risk of recession, investors' expectation of a US recession has decreased significantly compared to last year, according to JPMorgan's model. The agency's trading model shows that a recession is currently priced in with a probability of less than 50% for the US economy . However, when we evaluate the current status of macro indicators that stood out as reliable recession indicators in the past, we think that the probability of a recession in 2023 (within the second or third quarter) is quite significant.


• Despite the slowdown in global growth, we expect the potential decline in oil prices to be limited due to ongoing geopolitical risks and OPEC's production cuts. Accordingly, we assume that the Brent oil price will fluctuate between $80-100/bbl throughout the year (we assume that price levels outside this range will not be sustainable). We also anticipate that gas cuts from Russia to Europe will continue and the TTF spot gas price will remain well above historical averages.


• We believe that the possibility of a recession may continue to be priced in positively for the stock market for a while more, as we expect the downtrend in CPI inflation to get more pronounced until 2Q22. Taking historical trends as a guide, if the U.S. economy is to enter a recession by say in 2Q23, we might expect further losses in the S&P-500 index. We evaluate that there may be up to a 10-15% loss potential in the S&P-500 index from the trough levels (~3,600) tested back in October.

China's normalization will have a positive impact on various sectors in 2023.

• At the end of 2022, Chinese authorities announced that as of January 8, 2023, there will be no need for quarantine for arriving passengers. Prior to this announcement, China also stopped publishing the daily number of cases after it stopped the Covid-19 PCR test application. The increase in the number of cases in the country since the U-turn in the restriction policy caused criticism to rise. China is facing the largest mass outbreak of Covid-19 ever seen in the country after abandoning strict epidemic control and prevention measures called "zero cases". It is estimated that more than 1 billion people (out of a population of 1.4 billion) will be diagnosed with Covid-19 in the winter months. On the other hand, the curfews and PCR tests implemented in China since the beginning of 2020 caused the economic growth rate in the country to slow down. As the end of China's strict Covid-19 restrictions accelerates the country's economic recovery, the country's GDP growth may accelerate towards 4.5-5.0% levels in the short term as lagged demand kicks in. Chinese policymakers recently signalled that regulatory pressure on tech companies would be eased, which may also be a supportive factor for short-term growth prospects. Nonetheless, we also anticipate that the growth potential of China will be severely suppressed in the medium-long term due to the ongoing problems in the housing market, the need to slow down credit growth, and weak domestic demand.


• Fed officials are voicing their concerns about China's rapid growth (especially over commodity prices) as a factor that could reverse efforts to ease inflationary pressures in the US economy. Louis Fed President James Bullard said that the normalization of China could cause inflation to accelerate again.


• China's normalization may actually pose inflationary pressure through commodity prices. On the other hand, the reopening of supply chains and the decline in freight prices may put downward pressure on inflation. Therefore, we presume that the effects of this process on global inflation and the economy may be limited.
• In conclusion, we are of opinion that the current conjuncture will have a positive impact on the commodities and aviation sector in 2023. Commodities such as petroleum, refined petroleum products, LNG, and soybeans could benefit from the demand of China. As a result of the normalization of China, we believe that the airline sector may return to its pre-Covid-19 performance in the first half of 2023. Recall that almost all previous forecastsindicated that recovery in the sector was not possible before 2024.

Global banks have raised their GDP forecasts for China.

• Morgan Stanley economists raised their GDP projections for 2023 to 5.7%, a 0.3% point increase according to the previous estimates. “The short-term pain of a rapid normalization will likely be offset by an earlier and stronger recovery” and “The market does not adequately appreciate the far-reaching consequences of normalization,” Morgan Stanley economists said. Other financial institutions have also raised their GDP forecastssince China abandoned harsh Covid-19 controls.


• Goldman Sachs economists raised their 2023 GDP forecast to 5.2% in December 2022. The US investment bank has not increased its forecast since then. However, the bank said in a research note released in January that it was ready for a further upswing in growth. The bank thinks the risk to these estimates could be upside if Covid diminishes relatively quickly, the risk to these forecasts could be upside as the peak in nationwide cases is likely behind,” the bank said.


• International Economic Institutions are making pessimistic forecasts according to investment banks. In December, the World Bank said it expects China's GDP growth to reach 4.3% in 2023 and had lowered its previous GDP growth forecast for the country from 4.5%. The World Bank said its forecast was exposed to significant risk, citing the possibility of renewed mobility restrictions and persistent stressin the real estate sector.
• In November 2022, the International Monetary Fund (IMF) predicted that China's GDP growth would be 4.4% in 2023. IMF Director Kristina Georgieova warned that in the first weeks of 2023, the new Covid-19 wave in China could pull the world economy down. Georgieova said that the impact of the epidemic on both Chinese growth and global growth will be negative.

Global Growth Scenarios: Most global Institutions stress the increased risk of a Global recession

• According to the IMF's "World Economy Overview" report published in October, economic growth in the world economy (excluding the EU region) is expected to decline from 3.2% in 2022 to 2.6% in 2023. According to the report, it is expected to remain at the recession border with 3.1% and 3.6%, respectively, in 2024 and 2025. The IMF stated that they would not make any changes in their growth forecasts to be published in January.


• In the OECD's "Overview of the World Economy" report released in November, the global economic growth rate is expected to decline to 2.2% in 2023 and rise to 2.7% in 2024.


• While the World Bank is discussing the possibility of a recession, it divides the issue into three scenarios as “Base”, “deceleration” and “hard recession”. In the “base” scenario, the growth rate in the world economy remains at the recession border with 2.4% and 3.0% in 2023 and 2024. In the “hard recession” scenario, growth rates decrease to 0.5% and 2.0%.
• Finally, the United Nations (UN) predicts that global economic growth will decline to 1.9% in 2023 due to the food and energy crisis caused by the Russia-Ukraine War, the continued impact of Covid-19, and high inflation. This rate was recorded as the lowest growth forecast among institutionsin recent years.

At this point, our expectation is that there will be a significant slowdown in the European economy, bringing 2023 growth to slightly negative, although mild weather conditions in winter months so far have reduced the possibility of an energy crisis. Regarding the U.S. economy, although the employment market remains fairly strong, many leading indicators that have proven reliable in predicting recessions in the past actually imply that the probability of the US economy entering a recession in 2023 is quite strong. These indicators may be summoned as the pace of the FED’s tightening, inversion of the yield curve, consumer confidence, dipping unemployment rate and Conference Board’s leading economic index (LEI). While we expect the US economy to enter a recession in 2023 (possibly by the end of 1Q23 or in 2Q23), we anticipate that it will be mild and short-lived. The Chinese economy, on the other hand, may display a positive outlook in the short term due to the reopening process. Developing countries can also be on the side of recovering the world economy in parallel with China, although we are not optimistic about China’s growth prospects over the longer term. Combining these, our global growth forecast for 2023 is at 1.9%.