SINGAPORE - In 2024, the world will see slowing economic growth, falling inflation and easier monetary policy, with the US Federal Reserve likely to cut its key rate only in June or later, according to global bank Morgan Stanley.

“Finesse will be needed to find openings in markets which can generate positive returns,” noted strategist Serena Tang and her team in a Global Strategy report titled Threading The Needle.

They cited a host of challenges including tight financial conditions, rate cuts generally not expected until later in 2024 and an earnings recession still in train.

Bond supply continues to be a market concern, emerging market fundamentals face headwinds and cross-asset correlations have not budged from extremes, they added.

The investment bank released the strategy report at its 22nd Annual Asia-Pacific Summit at the Mandarin Oriental on Wednesday, where it hosted some 3,000 clients.

Morgan Stanley strategists noted that the hikes in US interest rates since early 2022 – the most aggressive in 40 years – had not had a catastrophic impact on financial markets, corporates or consumer spending.

But as the Federal Reserve moves to pivot in 2024, the bank sees high quality bonds outperforming, the US dollar remaining strong during the first half, US equities riding higher and commodities – especially oil – remaining range bound next year. It is advising clients to buy US Treasuries and investment grade corporate bonds, and selectively add equities.

Morgan Stanley characterised its 12-month outlook for returns across major equity markets as “comfortably positive”.

It is particularly upbeat on Japan equities, where it sees sustained reflation, rising productivity and improved corporate governance driving the market. “We expect Japan equities to continue to outperform emerging markets and China, given our relatively positive view on both earnings and valuations,” it said.

It also sees US equities holding up in 2024, with the S&P 500 index moving to 4,500 points despite near-term risks.

“In the US, we like healthcare, staples, and utilities, select growth opportunities, and late-cycle cyclicals.”

Within Asia-Pacific ex-Japan, Morgan Stanley prefers Singapore, India, Mexico, Greece and Poland, while downgrading South Korea and the Middle East.

“In Asia, we expect a recovery in semiconductors and also prefer energy and nearshoring-exposed industrials,” Morgan Stanley strategist Michael Wilson and team noted. “We like financials in Japan, Singapore, India and Indonesia.”

Nearshoring refers to companies bringing production back home or to friendly neighbouring countries.

That said, the bank is not particularly upbeat on emerging markets, noting that returns look less compelling across stocks, credit and local rates.

“Fundamentals look challenging for emerging markets. Geopolitics will weigh on some countries. And the potential for China entering a debt-deflation loop remains a headwind for emerging market outperformance,” it said.

In China, Morgan Stanley sees a potential rise in corporate defaults, faltering credit growth, rising uncertainty about future income and falling consumer spending as wealth is locked up in a property decline.

On the other hand, the bank is overweight on high grade bonds, including US Treasuries, corporate credit and securitised credit.

“Even if rates don’t fall as much as we expect, for yield focused investors, US core bonds at over 6 per cent yield are the most attractive since 2009. Valuations for high quality fixed income look attractive outright,” the report pointed out.

Besides geopolitics, the bank also noted that 2024 will be an election year in the United States and other major economies, and the election outcomes could impact markets.

Correction note: This article has been updated for accuracy.