Full: https://www.morganstanley.com/ideas/thoughts-on-the-market-global-outlook
Global Economic Outlook (Seth Carpenter, Global Chief Economist)
- Global Growth: Anticipated around 3%, but with significant regional variability.
- US: Moderate slowdown expected due to residual monetary policy effects, waning fiscal stimulus, and phased-in tariffs on Chinese imports.
- Europe: Sluggish growth (~1%) with potential inflation below ECB targets, prompting rate cuts below neutral levels.
- China: Risk of further slowdown due to a debt-deflation spiral and insufficient fiscal policy pivot.
- Bright Spots: Robust growth in India, Japan, and parts of emerging markets (EM).
- Policy Factors:
- Tariffs on China will likely be phased in, causing inflation to rise gradually through 2025 and a growth slowdown into 2026.
- Fiscal policy uncertainties around the U.S. Tax Cut and Jobs Act, with implications likely in 2026.
Global Equity Market Outlook (Mike Wilson, Chief U.S. Equity Strategist)
- 2025 Equity Market Projections:
- U.S. equities expected to deliver high single-digit returns, driven by better earnings growth and easing rates.
- Japan continues to perform well due to corporate governance reforms, with similar return expectations.
- Europe faces challenges from tariff risks and weak exports, especially to China.
- Key Challenges:
- Valuation concerns: High-quality assets are expensive globally, making stock selection critical.
- Consensus soft-landing expectations are priced in, increasing downside risks if the scenario doesn’t materialize.
- Opportunities:
- Stock Picking: High dispersion rewards single-stock exposures.
- Rotational Strategies: Focus on adjusting for macroeconomic changes and sector/style shifts.
Global Credit Market Outlook (Andrew Sheets, Global Head of Credit Research)
- 2024 Backdrop:
- Credit markets thrived amid moderate growth, inflation, and policy rates, with spreads tightening to near 20-year lows.
- 2025 Expectations:
- A “story of two halves”:
- First Half: Favorable backdrop with strong U.S. and European economic momentum, central banks cutting rates, and moderating inflation.
- Second Half: Increased uncertainty as central banks halt rate cuts, economic divergence emerges, and yields drop.
- A “story of two halves”:
- Preferred Sectors and Regions:
- Levered Loans: Attractive due to relatively wider spreads and risk premium.
- Regional Dynamics: U.S. credit markets expected to outperform, while Asia underperforms due to tariff risks and elevated valuations.
Key Themes and Strategies
- Macroeconomic Divergence:
- Regional differences in growth and policy responses underscore the importance of diversification and active management.
- Key risks include inflationary shocks from tariffs, geopolitical tensions, and policy uncertainty.
- Stock and Credit Selection:
- High dispersion in equities and credit rewards careful stock picking and sector rotation.
- Focus on undervalued opportunities in specific asset classes like levered loans and Japanese equities.
- Navigating Tariff Impacts:
- Tariff escalation on Chinese imports creates phased inflation and growth risks, particularly impacting Europe and Asia.
- U.S. markets are relatively insulated and likely to outperform in a risk-off environment.
- Monetary Policy and Rate Sensitivity:
- Central bank rate cuts will support credit and equities in the first half of 2025, but declining yields and rate pauses could temper demand later.
Morgan Stanley’s 2025 investment outlook emphasizes careful navigation through macroeconomic uncertainties and regional disparities. Opportunities lie in selective equity markets, high-yield credit, and levered loans. Stock picking and active management will remain critical as markets face increased policy risks, inflationary pressures, and valuation challenges.
