Morgan Stanley cuts ASX 200 target to 8,000, expects Aussie stocks to hold firm

Australian equities are weathering global tariff turbulence with relative strength, supported by limited US trade exposure and robust domestic policy settings, according to Morgan Stanley.

However, heightened global risks have prompted analysts to lower the year-end price target for the S&P/ASX 200 from 8,500 to 8,000, with the original target now pushed back to mid-2026.

The analysts highlight Australia’s defensive appeal, noting that the country’s goods exports to the US account for less than 1% of GDP, insulating it from the worst of recent trade disruptions. With exports comprising 24% of GDP — 70% of which are commodities — Australia faces more price than volume risks due to its low-cost production. A weaker Australian dollar and supportive fiscal and monetary policies further cushion the economy.

The RBA is expected to accelerate its path to a neutral stance, with three interest rate cuts planned for 2025, starting in May and bringing the cash rate to 3.35% by August. Additional fiscal spending, fueled by pre-election commitments, is set to bolster domestic demand, particularly in housing-related sectors. This backdrop supports earnings resilience, though consensus forecasts still expect negative 1.6% earnings growth for FY25.

Analysts have adjusted their valuation approach, reducing the ASX 200’s price-to-earnings multiple from 17.0x to 16.2x, aligning with the 10-year average, as global stagflation risks weigh on sentiment. The revised 8,000 target reflects capped upside potential, with a bear case lifted to 6,750 from 6,200, buoyed by policy buffers.

Source: Morgan Stanley Research

Portfolio Shifts Favor Domestic Earnings

Morgan Stanley runs a 'Model Portfolio', designed to outperform the S&P/ASX 200. The portfolio has recently shifted its weightings towards defensives like Real Estate and Telcos, while offloading positions among Banks and Financials.

Source: Morgan Stanley Research

In terms of stock-specific allocations, the report noted changes, including:

• Additions: Eagers Automotive (APE), Amcor (AMC), Cleanaway Waste Management (CWY), and Xero (XRO)

• Increased weightings: ANZ Banking Group (ANZ), Wesfarmers (WES), and Coles Group (COL)

• Removals: Paladin Energy (PDN) and Origin Energy (ORG)

Some of the thematic and sectoral changes/commentary include:

• Real Estate Investment Trusts (REITs), telecommunications, and utilities remain overweight, with new defensive positions in CWY and AMC.

• Structural growth is prioritised through Xero.

• Resource exposure is trimmed, retaining large-cap miners BHP, Rio Tinto, and South32, alongside gold producer Newmont (NEM).

• Energy holdings are concentrated in Santos (STO), with reduced exposure to Woodside (WDS).

Risks to Watch

"The global backdrop is volatile and likely to change significantly over the coming months, with risks skewed to the downside," says Morgan Stanley. The analysts said they are watching three key variables over the near-term, including:

1. Commodity prices and whether they fall enough to offset Australian dollar weakness or pressure export volumes.

2. House prices, which were highlighted as the 'ultimate barometer of household sentiment. Periods when house prices did not respond to rate cuts have typically coincided with poor share market performance and adverse economic conditions.

3. Corporate commentary on the job market and private sector growth.

While China’s potential stimulus and tariff relief could lift resources, global demand uncertainties pose challenges for energy markets.

The Bottom Line

Despite near-term headwinds, Australia’s equity market is positioned to outperform regionally, with policy support and domestic earnings providing a solid foundation. The ASX 200’s path to 8,000 hinges on navigating global volatility while leveraging local strengths.