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Global Stocks Retreat on China Lockdowns, Inflation

Market Vitals

  • Inflation, rising interest rates and slowing economic growth in several countries are weighing on equity markets globally.
  • China’s zero-COVID policies are elevating concerns about the global supply chain.
  • Central banks globally are focused on tamping down inflation and reducing easy monetary policies set in place during the pandemic.

Market Summary — COVID-19 and Inflation Rear Their Ugly Heads

Global stocks were down roughly -8% in USD terms (-6.5% local terms) in April as measured by the MSCI AC World Index. Strict COVID lockdowns in China, Russia’s ongoing war in Ukraine, slowdowns in economic growth and concerns about aggressive interest rate hikes caused investors to seek safety — all of which has contributed to significant YTD losses in major global equity markets. Latin America and the Middle East/Africa are exceptions, buoyed by rising commodity prices.

Exhibit 1 — April and YTD Total Returns for Major Markets (USD) (%)


Exhibit 1

Source: FactSet, Morningstar Global Markets Index. As of 30 Apr 2022.

From a sector perspective, defensive market areas held up best in April with consumer staples stocks the only gainers. Energy and utilities were also resilient with only modest losses. Global communication services, technology and consumer discretionary stocks on the other hand fared the worst, as earnings season highlighted slowdowns at some high-profile companies.

Exhibit 2 — April Sector Performance, Morningstar Global Markets Index (USD) (%)


Exhibit 2

Source: FactSet.


Shanghai, the country’s largest and wealthiest city, has been in a month-long lockdown due to the rapidly spreading Omicron variant — the worst rate of spread since the pandemic began. Outside of Shanghai, the country is experiencing COVID outbreaks in dozens of cities that have instituted varying degrees of lockdown.

Because of China’s importance in many supply chains, China’s zero-tolerance COVID policies have sparked concerns about an economic slowdown and further disruption to the global supply chain, which is a hangover from the 2020 pandemic. This, along with the war in Ukraine, will likely continue to drive up prices, fueling inflation and challenging central banks’ monetary policies.


The European Central Bank (ECB) confirmed it will end its bond purchases in Q3 2022. Once the asset purchase program ends, it is expected the ECB will begin raising interest rates as inflation in the region reached 7.5% in March.

Gross domestic product (GDP) in Germany grew slightly in Q1 but the war in Ukraine has started to impact near-term growth, causing the government to reduce its growth expectations for the full 2022 calendar year. France’s economy stagnated as higher inflation and rising energy prices hampered consumer spending. Italy’s GDP growth contracted in Q1 from the previous three months, marking the first q/q decline since Q4 2020. Consumer confidence in the UK fell to a near all-time low as the cost of living continues to rise, economic growth slows and the pound falls to its lowest level since 2020 (Exhibit 3). Additionally, inflation in the UK reached a 30-year high of 7% and the International Monetary Fund reduced its GDP growth expectations for 2022-2023.

Exhibit 3 — US Dollar per British Pound


Exhibit 3

Source: FactSet.

United States

US inflation hit a 40-year high in March, rising 8.5% from a year earlier. The Federal Reserve met expectations by increasing interest rates by 25 basis points at its March 16 meeting and by 50 basis points at its May 4 meeting (the largest move since 2000) in an effort to impede further inflation pressures as energy and food prices — only exacerbated by the war in Ukraine — continue their ascent.

In Q1, US GDP fell at an annual rate of 1.4% despite jobless claims remaining at historically low levels and resilient consumer and business spending. Economic growth in upcoming quarters will be dependent on a variety of factors playing out, including where inflation and interest rates go.

MSCI ACWI Index measures the performance of large- and mid-cap stocks across 23 developed and 25 emerging markets. Morningstar Global Markets Index measures the performance of the stocks located in developed and emerging countries as across the world. The index(es) are unmanaged, market capitalization weighted, include net reinvested dividends, do not reflect fees or expenses (which would lower the return) and are not available for direct investment.

The views expressed are those of Diamond Hill as of May 2022 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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