2025 should be another good year for risk assets: Moderate growth and disinflation support elevated valuations.
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A deregulation focus and continued key central bank easing are additional tailwinds. However, we believe that markets will be sensitive to the substance, severity, and sequencing of fiscal, trade, and immigration policies of the incoming US administration, all of which could drive divergent investment outcomes.
Global real growth trends are dispersed across regions but overall, global growth is softening.
Morgan Stanley forecasts global growth to remain near 3% for the next couple of years. In the US, however, we anticipate a slowdown in 2025 driven by the waning impact of fiscal policy, the delayed effects of ongoing restrictive monetary policy, and the introduction of new tariffs and immigration restrictions. Additionally, we foresee weaker growth in China next year due to insufficient consumption stimulus and the potential for higher US tariffs. In Australia, growth is expected to improve but remain below trend.
On inflation, we expect continued but slower progress in 2025, allowing further rate cuts around the world.
We anticipate further, although slower, progress on inflation next year. In the US, reduced immigration and new tariffs will slow disinflation compared to our previous forecasts, leading to inflation staying slightly above target over the next two years. Consequently, we expect the Federal Reserve to continue lowering rates until the May 2025 meeting, after which it will likely pause. In the euro area and the UK, subpar growth keeps the disinflationary process on track and we see continued rate cuts by the European Central Bank and the Bank of England. The Bank of Japan continues on its contrarian trajectory and hikes interest rates twice in 2025.
Australian Economic Outlook: continuing to muddle through.
In Australia, our economists expect economic growth to improve gradually over 2025, although it will remain below trend. While households’ real incomes are likely to increase due to lower taxes and inflation, we anticipate only a modest impact on spending as consumers remain cautious. Savings rates are expected to rise slightly as house prices stabilise and household wealth flattens. Business investment is set to grow steadily, supported by strong nominal activity and declining capital-labour ratios, while dwelling investment will see a more significant pick-up late in 2025 as interest rate cuts take effect.
Migration is expected to return to pre-Covid levels, creating a headwind for service exports and broader domestic demand. Government spending is likely to continue driving much of the economic growth, particularly in the lead-up to the Federal election scheduled before May 2025, when we expect both major political parties to propose policies aimed at supporting demand.
Government spending remains a key growth driver near-term in Australia. The labour market remains strong and we expect this to continue through the first half of 2025, with solid but slowing job growth, largely driven by government policies. Alongside some assumed increases in participation, the unemployment rate is expected to rise only gradually.
We maintain our expectation of a gradual disinflationary trend over the next year. While wage growth has peaked, it is projected to stabilise around 3.5% in 2025, which will limit disinflation in services, especially as productivity remains weak.
In this environment, our economists anticipate that the Reserve Bank of Australia (RBA) will lag behind other central banks in easing over the next six months. The first interest rate cut is expected in May 2025, after the Federal election. This is projected to be followed by two more rate cuts in August and November, bringing the cash rate down to 3.60% and close to the RBA’s neutral rate estimate.
2025 expected to be positive for risk assets.
As a result, 2025 is expected to be another strong year for risk assets, with moderate growth and disinflation supporting elevated valuations. A focus on deregulation and ongoing easing by key central banks will provide additional tailwinds. However, we believe markets will remain sensitive to the specifics, intensity, and timing of fiscal, trade and immigration polices under the incoming US administration, as these factors could lead to varied investment outcomes.
Favourable for Global Equities.
We recommend an Overweight (OW) in Equities. While valuations are elevated, they reflect stronger-than-average fundamentals. Moderate growth, disinflation, deregulation and monetary policy easing create a favourable environment for risk assets, particularly benefiting US corporates, despite ongoing uncertainty surround policy changes. Morgan Stanley’s US strategists have raised their year-end 2025 price target for the S&P 500 to 6500.
Beyond the US, our regional preferences include Japanese equities, supported by a robust secular reflation theme. We favour Australian equities over European equities, with the latter downgraded to Neutral due to tariffs and China exposure. Meanwhile, Emerging Markets remain our least-preferred region amid escalating trade tensions.
ASX Outlook.
We expect a similar scenario for Australian equities in 2025 as seen this year: a positive outlook although likely to lag behind major Developed Markets, particularly the US. Our strategists have raised their year-end 2025 price target for the ASX 200 to 8500 after lifting the base case multiple to 17.0x and forecasting a return to 10% earnings per share growth in 12 months time. However, for any meaningful upside from here, earnings trends need to start to improve.
Fixed Income Allocation.
Falling global interest rates would suggest an OW position in duration for most government bonds in the first half of 2025, except Australia. However, despite positive expected returns, we are Underweight (UW) in government bonds overall, as Equities and Credit offer greater appeal. We are concentrating our duration exposure in International bonds and maintaining a strong UW position in Australian bonds given policy divergence.
Credit Market Outlook.
In Credit, we foresee a stronger performance in the first half of 2025, followed by a weaker second half, prompting a gradual shift to caution. Identifying the right Credit exposure, curve positions and sectors will be critical as market opportunities narrow.
Commodities Outlook.
In Energy, we anticipate lower crude oil prices in 2025 due to rising supply from both OPEC and non-OPEC producers, outpacing slowing demand growth.
Regarding Metals, copper remains our top pick driven by declining inventories and demand recovery at lower price levels, although uncertainty will likely persist following the outcome of the US election and potential China policy shifts. We see limited upside for gold. While rate cuts may provide a tailwind, physical demand is beginning to soften.
Alternatives Outlook.
We continue to favour Alternative Investments as the most attractive asset class in the current environment. Our positioning includes a mix of commodities (including gold), hedge funds and select private investments to enhance returns, reduce portfolio volatility and manage equity beta risk.
To view Morgan Stanley’s full 2025 outlook, please reach out to your Morgan Stanley Financial Adviser or representative.
ABOUT THE AUTHOR
Alexandre Ventelon | Head of Wealth Management Research
Alexandre is the Head of Wealth Management Research for Morgan Stanley Australia. Since arriving at Morgan Stanley, he has developed Wealth Management’s multi-asset investment approach which was recognised by the Institute of Managed Account Professionals (IMAP) as the winner in the 2020, 2021, 2022 Licensee Managed Account category, and the 2021 Multi Asset Class category. Alexandre is primarily responsible for producing investment strategy research and providing implementation advice across listed Equities, Alternatives, Managed Funds and ETFs to Morgan Stanley’s advisers and their clients. Alexandre has more than 18 years of investment management experience, in both wealth and institutional money management. Prior to joining Morgan Stanley in 2017, Alexandre spent four years at AustralianSuper as an Investment Strategist; and six years as a Multi-Asset Portfolio Manager with Credit Suisse in Europe, Asia and Australia. Alexandre holds a Master in Management from Toulouse Business School and a Master in Portfolio Management from the University of Paris XII.