Morgan Stanley's 12-month ASX 200 forecast and where to place your bets

Australia’s equity market is poised for resilience in 2025, offering a defensive haven for investors navigating global economic headwinds, according to Morgan Stanley.

With supportive domestic policies and limited exposure to international trade disruptions, the analysts retained a 12-month price target of 8,500 for the S&P/ASX 200 on Wednesday.

A Stable Domestic Outlook

Morgan Stanley expects Australia’s economy to grow below trend but improve from last year’s sluggish performance, underpinned by:

• A re-elected federal government with a strong majority is set to maintain fiscal stimulus, bolstering domestic demand.

• RBA is anticipated to cut rates twice in 2025 (August and November) and once in 2026, approaching a neutral rate of 3.1%.

• Limited exposure to US tariffs, with goods exports to the US accounting for less than 1% of GDP

• Commodities make up 70% of Australian exports, and low-cost production and stable capex cycles should mitigate price volatility

ASX 200: A Balanced Investment Case

The mid-year 2026 target of 8,500 is based on a 17x 12-month forward PE and a year-on-year earnings recovery of 11%, largely driven by a rebound in resource-related earnings.

Source: Morgan Stanley

The index’s dividend yield, pegged at a long-term average of 4.5%, adds to its appeal. However, upside may be capped in the near term due to elevated valuations and global stagflation risks, with earnings growth needed to drive further gains.

In a bullish scenario, where inflation moderates faster than expected and the RBA achieves a “soft landing,” the ASX 200 could climb to 9,500, with domestic sectors like housing and consumer stocks leading the charge.

Conversely, a bear case with stubborn inflation and aggressive policy tightening could see the index drop to 6,650, a 16% downside.

Where to Invest: Domestic and Defensive Focus

Morgan Stanley advises investors to prioritise domestically focused companies and sectors sensitive to interest rate cuts, while maintaining selective exposure to growth and resources. Here are their key recommendations and themes.

Defensive stocks that offer stability amid global volatility, including:

• Coles Group (ASX: COL)

• Amcor (ASX: AMC)

• Cleanaway Waste Management (ASX: CWY)

• Telstra Group (ASX: TLS)

• Transurban Group (ASX: TCL)

• The Lottery Corporation (ASX: TLC)

• GPT Group (ASX: GPT)

Interest rate sensitive stocks that will benefit from the RBA’s path to lower rates, particularly in discretionary and housing-linked sectors.

• Wesfarmers (ASX: WES)

• Scentre Group (ASX: SCG)

• Stockland (ASX: SGP)

• AP Eagers (ASX: APE)

Growth stocks with structural growth remain attractive for long-term investors, such as:

• Xero (ASX: XRO)

• WiseTech Global (ASX: WTC)

• ResMed (ASX: RMD)

• Goodman Group (ASX: GMG)

• Macquarie Group (ASX: MQG)

Resources stocks could provide a hedge against potential global stimulus or tariff relief, notably:

• BHP Group (ASX: BHP)

• Rio Tinto (ASX: RIO)

• South32 (ASX: S32)

• Newmont Corporation (ASX: NEM)

The Bottom Line

Morgan Stanley notes that the S&P/ASX 200 has exhibited significantly lower volatility this year, outperforming global benchmarks in April and recovering quickly from the 'Liberation Day' selloff. However, local equities have underperformed in May.

A combination of robust fiscal spending and a cautious RBA easing cycle positions Australia as a relative safe haven. For investors, this supports a strong case for domestic-focused, high-quality stocks, complemented by selective investments in growth and resource sectors to balance risk and reward.