Morgan Stanley’s outlook for 2025 finds a “still-moderate macro environment” with the mood heading towards deregulation, which it notes is largely is constructive for risk assets.
“That said, rising uncertainty about policy sequencing and severity implies that timing rotation through 2025 will be key. Overweight in global equities, and in spread products within fixed income.”
While the firm identifies this as a ‘Goldilocks’ situation going into 2025, the way that policy sequencing and the severity of policy changes will have an impact.
“Moderate growth, disinflation, deregulation, and monetary policy easing are favourable for risk assets, but which policies implemented when and to what extent by the incoming US administration mean we believe that sequencing and severity will be key. This uncertainty overhang drives a wide bull-bear range.”
In its latest paper, ‘2025 Global Strategy Outlook: Timing Is Everything’ the bank’s collective strategists and summarise the following as its house view across seven investible asset classes:
Global equities – prefer US and Japan: US valuations are rich, but growth and potential policies, especially deregulation, benefit US corporates, even as uncertainty around the impact of other policy changes lingers. An intact secular reflation narrative means we continue to like Japanese equities. We move down to neutral on European equities on tariff risks and China exposure. EM remains our least-favoured market on increasing trade tension.
G10 rates – bullish duration: We expect Treasury yields to decline as the Fed cuts more than what is priced into markets, and the story is similar in Europe and the UK. Potential downside risks to growth from trade and immigration reforms mean that the US front end will likely be biased lower and the Treasury curve bull steepens.
G10 FX – USD faces cross-cutting forces: US tariffs and risk premium associated with trade and geopolitical tension are USD-positive, leading the greenback higher into end-2024. But falling real rates should limit USD strength in 2025. JPY and AUD are the top G10 performers while EUR/USD lags on weak euro area growth.
Emerging markets (EM) fixed income – a matter of ‘when’ to buy: Lower US treasury (UST) yields should support EM fixed income. Trade tension is a risk, although EM credit is less Asia-dependent than EM stocks, and any weakness should be front-loaded. We like CLP, PLN, and INR in EM FX and HUF and INR in local bonds; we expect MXN rates to outperform in LatAm.
Corporate credit – a year of two halves: An environment of moderation sustains corporate credit into 1H25. However, as ‘animal spirits’ grow and take hold, we expect a weaker 2H25 with equities outperforming. We see leveraged loans offering the best risk/reward, followed by IG and HY. We prefer US over Europe over Asia.
Securitised products – banking on demand: Attractive relative valuations alongside deregulation and freed-up capital at banks should be supportive for most securitized products next year. We like single-family and multifamily agency MBS, CLO AAA globally, and non-QM RMBS. For investors looking to take on greater credit risk, we prefer CLOs versus CMBS.
Commodities – headwinds for oil and gold, bullish on copper: Brent prices are challenged by OPEC and non-OPEC supply growth outweighing demand. In metals, copper is our top pick due to demand recovering with lower prices. Gold upside is limited, with a stronger USD a potential headwind.
