Morgan Stanley’s mid-year outlook and implications for Australian investors
A clearer path of disinflation, growth, and policy over the next few months is likely to establish a constructive outlook across both Equity and Bond markets. The global economy is forecasted to experience stable growth and moderate disinflation through 2025, allowing for rate-cutting cycles to begin in most Developed Markets (DM). Domestically, fiscal stimulus is expected to drive an improvement in activity through the second half of 2024 but also keep inflation above target. The Reserve Bank of Australia (RBA)’s less-restrictive monetary policy settings will face challenges, with interest rates predicted to remain unchanged before easing in early 2025 when labor market weakness becomes more apparent.
### Growth outlook
The global economy is anticipated to be characterized by stable growth and moderate disinflation through 2025. Tight monetary policy may slow growth, even as rate-cutting cycles commence. Volatility is expected to continue in 2024 as the global economy transitions to a slower pace, akin to the mid-1990s. Morgan Stanley projects global GDP to hold steady at just over 3%Y, with the US and ex-US growth differing.
In the US, a slower but solid pace of growth is forecasted due to constrained private demand and tighter monetary conditions. In the Euro area, modest growth acceleration is expected in 2024, followed by an improved 2025. Japan and China are anticipated to experience growth with varying factors influencing their economic outlook.
### Inflation outlook
Globally, inflation continues to decelerate, with low inflation levels sustained even with improving growth. While lower energy prices ease inflation levels in DM economies, core inflation remains somewhat inertial. The US, Euro area, Japan, and Australia are expected to see inflation trends, with some regions converging back to target in the coming years.
### Monetary Policy Outlook
Expectations for gradual monetary easing are seen across DM central banks, with the European Central Bank and Bank of England anticipated to lower interest rates. Domestically, fiscal stimulus is projected to drive activity improvements through 2H24 while keeping inflation above target. The RBA’s less-restrictive policy settings may face challenges, potentially leading to a shift in early 2025.
### Cross Asset Views
In the equity markets, an earnings rebound is expected in 2024, driven by various factors. Japanese and European markets are preferred regions due to strong earnings revisions and attractive valuations. The US remains Equal-weight, with specific sectors and markets showing compelling opportunities.
Regarding government bonds, an Overweight duration stance is recommended, with most investors expected to close underweight duration positions. Credit markets remain favorable, with Credit offering better risk/reward opportunities in certain regions. FX markets and commodities are also expected to see shifts based on policy changes and market dynamics.
In conclusion, the mid-year outlook from Morgan Stanley provides insights into the global economic landscape and implications for Australian investors. With forecasts pointing towards steady growth, changing inflation levels, and monetary policy adjustments, investors are advised to evaluate their portfolios and consider potential opportunities in different asset classes. For more information and personalized financial advice, individuals are encouraged to consult with a financial adviser to align their investments with their financial goals.