Global outlook uncertain? Morgan Stanley bets on these asset classes, investment direction has become clear

According to the Zhitong Finance APP, Morgan Stanley provided forecasts on the global economic outlook, stock markets, major central bank dynamics, and commodity markets in a research report released on May 27. Here are the bank's predictions.

1. Global economic growth is biased towards a downturn in the next 12 months

Morgan Stanley stated that the large-scale tariff increases in the United States pose a structural shock to the global trade order. The tariffs themselves and the uncertainty they bring will significantly drag down growth, but considering the strong start at the beginning of this year, the bank does not expect a global economic recession. The bank predicts that the year-on-year growth rate of the global economy will slow from 3.5% in the fourth quarter of 2024 to 2.5% in 2025. The bank added that this trade shock has synchronously impacted many countries globally, causing economic growth rates to generally fall below potential levels.

For the United States, Morgan Stanley expects the real GDP growth rate to decline from 2.5% in the fourth quarter of 2024 to 1.0% in 2025 and 2026. The risks brought by the trade shock are asymmetric. The bank's baseline assumption is that, although trade tensions have eased recently, tariffs will not be completely lifted. Economic damage has already occurred, and even a complete removal of tariffs will not restore global economic growth to levels seen before the tariffs were imposed. Conversely, if tariffs are escalated back to previous highs, the United States and even the global economy will face recession risks.

Morgan Stanley stated that the tariff shock has suppressed global demand while also putting pressure on U.S. supply, and the U.S. government's immigration restrictions will also drag down the economy. In the Eurozone, tariffs have hindered exports and investment, and the boost from the fiscal package is insufficient to overcome this drag. In Japan, the slowdown in global economic growth has affected the country's exports and investment.

2. Bullish on U.S. assets excluding the dollar

Morgan Stanley believes that although global growth is slowing, macroeconomics does not equate to the market. The bank argues that "changes in expectations" are more critical for risk assets, and a "less bad" scenario is actually favorable for the market, especially in the context of previously very low expectations. Risk assets may perform well despite low growth, while U.S. Treasuries will benefit from the bank's forecast of multiple rate cuts by the Federal Reserve in 2026 and may strengthen. However, current valuations indicate that the stock and credit markets are almost completely ignoring the risks of slowing growth, so the bank recommends a comprehensive allocation to "high-quality" assets.

Morgan Stanley advises investors to increase their allocation to U.S. stocks, U.S. Treasuries, and investment-grade corporate bonds, focusing on high-quality assets, while refuting the view that "foreign capital will sell U.S. assets." The bank added that it is not optimistic about the dollar itself, predicting that as the growth and yield differentials between the U.S. and other global regions narrow, the dollar will depreciate significantly. In the next 12 months, public policy will cause volatility, but this means selling the dollar rather than selling U.S. assets.

Morgan Stanley expects U.S. Treasury yields to remain volatile until the fourth quarter of 2025, when the market will be more confident that the Federal Reserve will cut rates. The bank predicts that the yield on 10-year U.S. Treasuries will reach 4.00% by the end of 2025 Morgan Stanley believes that the US Dollar Index (DXY) remains under pressure and will decline by 9% to 91 by mid-2026. This is due to the convergence of US interest rates and growth with other developed economies, as well as an increase in risk premium due to the weakening of safe-haven attributes and rising foreign exchange hedging demand. The firm believes that the continued presence of defensive mechanisms has led to strong performance of global safe-haven currencies, with the Euro and Yen expected to lead.

Morgan Stanley expects the US stock market to outperform other equity markets. The firm states that US stock market valuations have been readjusted, but there remains uncertainty regarding the overall impact of tariffs. The firm prefers high-quality cyclical stocks, large-cap stocks, and defensive stocks with lower leverage and valuations.

For the Japanese stock market, Morgan Stanley continues to favor companies benefiting from domestic re-inflation and corporate reforms, as well as those exposed to defense and economic security-related spending. The firm maintains a cautious stance on export-oriented cyclical stocks, as it expects a significant appreciation of the Yen.

For the European stock market, Morgan Stanley advises investors to shift from cyclical stocks to defensive stocks following the recent rebound, and to continue reallocating to relatively resilient sectors in the market. The firm identifies key sectors for increased allocation in the European stock market as: defense, banking, software, telecommunications, and diversified financials.

In the emerging markets stock market, Morgan Stanley favors companies with strong financials and profitability, with a preference for those focused on the domestic market rather than exporters and semiconductor/hardware companies.

3. Major Central Bank Dynamics

Morgan Stanley states that due to inflation remaining above target and tariffs further pushing up inflation, it expects the Federal Reserve to maintain interest rates unchanged until the end of 2025. Meanwhile, the firm anticipates that the Federal Reserve will cut rates by 175 basis points in 2026. This expected magnitude is higher than current market expectations.

The firm also believes that the Bank of Japan will remain on hold this year and in 2026. Additionally, it expects that weak economic growth and declining inflation will prompt the European Central Bank and the Bank of England to continue easing monetary policy. The firm forecasts that the European Central Bank will cut rates by 75 basis points this year, and the Bank of England will cut rates by 100 basis points this year.

4. Commodities: High Volatility but Lack of Clear Trend

1. Crude Oil: OPEC+ production increases have exceeded expectations, and further increases may occur in the coming months, exacerbating the firm's forecast of an oversupply in the crude oil market in the second half of 2025 and 2026. The firm has lowered its price forecast for Brent crude oil by $5-10 per barrel

2. Natural Gas: Despite record levels of liquefied natural gas and pipeline gas supply, and weak demand, the large-scale replenishment that began in April has loosened the supply-demand balance, subsequently driving up European natural gas prices. Europe's current natural gas inventory is low, and more liquefied natural gas needs to be imported during the summer to reach the target of 80% gas inventory rate. The competition between Europe and Asia for liquefied natural gas cargoes may push the European benchmark Dutch TTF natural gas futures price up to €40 per megawatt-hour.

3. Metals: Morgan Stanley has named gold as its top pick, as strong central bank demand and robust inflows into gold ETFs provide support, while concerns over economic growth and tariff uncertainties have boosted safe-haven demand. Additionally, industrial metals are currently performing well but are more susceptible to potential downside growth risks from U.S. tariff policies. If an economic recession occurs, metal demand typically declines by 1%-3%, and prices may retreat to cost support levels; in extreme cases, prices of major metals could fall another 10%-25%.

5. Credit Market

The market's recovery and positive news regarding U.S.-China trade relations have boosted market optimism, alleviating previous concerns of a "nightmare coming true," leading the market to reassess the previously overly tight credit spreads. As a result, Morgan Stanley has lowered its credit spread forecasts for multiple regions globally.