Morgan Stanley: Global economic growth is expected to weaken in 2025, maintaining "overweight" ratings for U.S. and Japanese stocks

According to the Zhitong Finance APP, Morgan Stanley recently published a research report on global investment strategies for 2025, providing forecasts and recommendations for global economic growth, monetary policy, asset allocation, and sector preferences for the coming year.

Policy Expectations

Morgan Stanley stated that based on U.S. President Trump's inauguration speech, the bank's baseline expectation remains that policies will only begin to impact the economic outlook later this year. Potential changes in tariffs and immigration policies, along with a slowdown in economic growth, will slow the anti-inflation process, but this slowdown will only occur later this year as policies are gradually implemented.

Looking ahead, the bank expects the Federal Reserve to cut interest rates twice in 2025, in March and June; the Bank of Japan is expected to raise interest rates in January, but there is also a risk that the increase may not occur until March; the European Central Bank and the Bank of England will cut interest rates at their next meetings.

Asset Allocation

The report pointed out that under the bank's economists' baseline expectations, a still moderate macro environment, combined with a focus on deregulation, is beneficial for risk assets. Nevertheless, the rising uncertainty regarding the sequence and severity of policies means that the timing of asset rotation in 2025 will be crucial. Compared to previous years, Morgan Stanley believes investors should remain flexible to anticipate rotations that may be triggered by policy changes.

Overall, the bank advises investors to maintain an "overweight" position in Japanese and U.S. stocks and to seek opportunities in fixed income spread products. Given that tariff risks have a broader impact on non-U.S. bond and stock markets, U.S. risk assets are expected to perform better than those in other regions globally. This expectation also applies to spread products—based on this, U.S. dollar credit is more attractive compared to euro corporate credit, with appealing spreads.

In terms of the stock market, Morgan Stanley believes that despite high valuations in the U.S. and ongoing uncertainty regarding the impact of other policy changes, U.S. stocks remain favored due to growth and potential new policies (especially deregulation). Among them, the bank prefers high-quality cyclical stocks. According to a survey conducted by the bank, 28% of respondents expect financial stocks to be the best-performing sector in the S&P 500 this year, a significant increase from last year's 14%, marking the highest level since 2022

Based on a complete long-term re-inflation narrative, the bank continues to be optimistic about Japanese stocks, favoring banks, insurance, and real estate sectors that benefit from domestic demand, re-inflation, and a steepening yield curve, as well as global companies focused on defense and capital goods.

Morgan Stanley downgraded its rating on European stocks to "neutral" due to factors such as tariff risks, favoring the telecommunications, software, diversified financials, and defense sectors at the industry level. Given the potential for increased trade tensions, emerging markets remain the least favored market by the bank.

Global Economic Growth

Morgan Stanley expects global growth in 2025 to be weaker than last year, with a different combination of growth drivers. The bank anticipates that growth in the U.S. will slow in 2025 due to the diminishing effects of fiscal policy stimulus, the ongoing restrictive impact of monetary policy, and potential new tariffs and immigration restrictions; the Eurozone continues to face weak domestic demand, with global uncertainty weighing on investment, while global trade is unlikely to provide much help; Japan may be a bright spot, with economic growth expected to accelerate starting in 2024.