Morgan Stanley's outlook on the global market: recommending "from stocks to bonds", favoring US and Japanese markets.

Recently, Morgan Stanley released a global market outlook report, providing investment decision references for investors. The bank mentioned that in a situation where macroeconomic data is mixed and policy uncertainty continues, they have adjusted their global stock rating to neutral (EqualWeight), recommending reducing stocks and increasing bonds, with a preference for the US and Japanese markets. Re-examining the policy puzzle: Policy uncertainty continues to loom, with mixed economic data As inflation tends to ease before the full impact of tariffs is revealed, Morgan Stanley expects the Fed to cut rates in June and believes the full implementation of tariffs may not be seen until the second half of the year or the turn of the year. However, the increasing uncertainty of tariffs will bring downside risks to economic growth. In recent meetings, the European Central Bank (ECB) cut policy rates by 25 basis points, while the Bank of Japan raised rates, both of which were in line with previous expectations. In the Chinese market, high-level officials have also signaled a moderately positive stance. Everything changes rapidly: The impact of the macro environment on risky and risk-free assets The bank believes that a mixed macro background affects both risky and risk-free assets. The uncertainty in US public policy has cast a shadow over the market outlook. In addition, the tightening yield spreads suggest that credit pricing already reflects optimistic market expectations, while stock market overvaluation reflects market optimism and assumptions about US exceptionalism, tariffs, and geopolitical risks, but these assumptions cannot all be valid simultaneously. The final result may be an increase in stock and credit risk premiums. Reducing stocks, increasing bonds: Adjusting asset allocation strategies The bank has adjusted its global stock rating to neutral (EqualWeight) due to worsening risk-return ratios, recommending reducing risk exposure. By increasing government bonds and overweighting "core" high-quality fixed income assets, while continuing to maintain an overweight position in spread products (such as leveraged loans, mortgage-backed securities). Furthermore, the bank reiterated its view of "US superior to other regions" (US > RoW) in asset allocation, considering greater uncertainty in non-US interest rates and stock markets due to tariff risks, with US exceptionalism still a dominant theme. In addition, they recommend purchasing low-cost downside risk hedging tools through credit. Stock investment preferences: US and Japanese markets favored Morgan Stanley believes that US stocks are overvalued, but potential new policies, especially deregulation policies, will benefit US companies. Although there is still uncertainty regarding other policy changes, they have a more positive outlook on high-quality cyclical US stocks. As for the Japanese stock market, they continue to be optimistic due to ongoing inflation expectations. In terms of industry selection, they prefer domestic demand, inflation-related stocks, as well as industries such as banks, insurance, and real estate, which are expected to benefit from the steepening yield curve. They also have a positive outlook on global income stocks related to defense and capital goods. Considering tariff risks and exposure to the Chinese market, the bank has downgraded European stocks to neutral. In the European market, they lean towards US domestic commodity stocks with lower exposure to tariffs, stocks with high pricing power, and stocks related to sustainable factors. At the industry level, they favor telecommunications, software, diversified financial, and defense sectors. Future 12-month economic growth expectations: Growth resilience faces challenges Morgan Stanley expects global economic growth to slow in 2025 compared to 2024, with changing growth drivers. In the US, economic growth is expected to slow down due to the waning impact of fiscal stimulus, continued tightening of monetary policy, and potential new tariffs and immigration restrictions. Weak domestic demand in the Eurozone, global uncertainty suppressing investment, and lack of support from global trade make growth challenging. Japan is a bright spot, with economic growth expected to accelerate compared to 2024.