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Sticky inflation and resilient growth would likely favour equities; meanwhile, fixed income may require a more selective and diversified approach, according to a report by Morgan Stanley.
The report noted that equities could benefit from stronger nominal growth, with fiscal policy, tax incentives and deregulation providing additional support. Morgan Stanley expects inflation to remain above target as resilient labour markets, productivity gains and capital investment will likely support real growth. "In this backdrop, equities are likely to benefit from stronger nominal activity, while fixed income may require a more selective and diversified approach to deliver attractive returns," it noted. Corporate earnings expectations have also continued to rise, supported by robust demand, improving productivity and expanding investment cycles. "We expect this trajectory to persist as long as the CapEx cycle continues to expand," it said. While the inflation outlook has turned higher, there are chances that key pressures may ease as tariff, energy and AI effects fade, Morgan Stanley notes. "Inflation may continue to skew high relative to target, while real growth appears poised to remain firm, supported by resilient labor markets, productivity gains and capital investment," the report noted. The report noted that while headline valuations appear elevated, they remain reasonable relative to earnings growth prospects and a structurally stronger nominal economy. It also expects market breadth to widen as geopolitical tensions ease, with several sectors still trading at lower valuations and offering room for a rebound. For emerging markets, the report highlighted "divergence" as a key theme. It noted that while equity valuations appear attractive, earnings revisions remain strong, led mainly by AI beneficiaries such as Taiwan and Korea. However, the report flagged that weak domestic momentum and limited policy support in China pose downside risks, while India faces a cyclical slowdown amid AI- and energy-related headwinds. Overall, it recommended investors seek income through a blend of investment-grade credit, high yield and emerging market debt rather than entirely relying on duration. "We believe fixed income's alpha contribution remains dependent on actively managing duration and credit risk," it said. (ANI)
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