Buy inflation protection, dump Australian equities: Morgan Stanley’s big portfolio reset

Its newly released 2026 Strategic Asset Allocation Review, written by Alexandre Ventelon and Wayne Chatterjee, makes three major changes: 

1. More inflation protection
2. Substantially less Australian equities 
3. Greater exposure to alternatives

The numbers behind that shift will raise eyebrows among Australian investors. But as my colleague Tom Stelzer and FNArena’s Rudi Filapek-Vandyck have written, domestic equities have lost their mojo (see here and here), so Morgan Stanley’s report is particularly timely.

In its Core Balanced model, Morgan Stanley has slashed Australian equities from 28% to just 15%, while its Growth portfolio cuts them from 48% to 29%. 

The investment bank’s underlying message isn’t necessarily to abandon risk assets. It’s to own very different ones suited to an environment where growth and inflation are running hot.

So, what does that look like in practice? Here are the three biggest changes Morgan Stanley is making to its portfolios – and what’s driving them.

1. Inflation is back at the centre of portfolio construction

The biggest change starts with Morgan Stanley’s macro assumptions.

Its “inflationary boom” scenario – where both growth and inflation run above trend – now receives a 40% strategic weighting, despite accounting for just 12% of realised history since 1970.

Combine that with stagflation, and inflationary regimes represent 65% of Morgan Stanley’s strategic weighting, versus 37% historically.

That has significant implications for diversification. Morgan Stanley expects higher volatility and greater stock-bond correlations than an unweighted historical approach would suggest.

Its response is to explicitly introduce inflation hedges including commodities, infrastructure, precious metals and floating-rate debt.

In the Balanced portfolio, commodities now account for 4%, global listed infrastructure 5%, floating-rate notes 8%, subordinated debt 4% and precious metals 2%.

2. Australian equities take the axe

The second major change will attract plenty of attention from Australian investors: Morgan Stanley has cut Australian equities across every existing risk profile. It's portfolios have weightings of 4-34% to domestic shares, compared to 7-65% for international stocks, depending on risk profile.

This is an “equity rotation, not reduction”, Morgan Stanley argues, adding that Australian equities are relatively less attractive because of:

• Limited exposure to the global AI capex boom
• Lower productivity growth
• Elevated valuations, with the All Ordinaries trading at 18.9 times forward earnings versus a 10-year average of 15.2 times

Morgan Stanley is more constructive on Australian fixed income, particularly floating-rate notes and subordinated debt, which can “capture higher yields if policy responds to inflation.”

3. Look beyond traditional shares and bonds

The final piece of the puzzle is alternatives.

For investors able to tolerate lower liquidity, Morgan Stanley’s portfolios allocate as much as 28% to alternative assets, including private equity, private credit, private infrastructure and hedge fund strategies.

Private equity has the highest seven-year expected return in Morgan Stanley’s investable universe at 12.2%, while newly introduced private infrastructure is forecast to return 9.7%.

There are some equally notable casualties. 

Australian and global listed property receive zero strategic weightings, private real estate is also zero weighted, while global high yield misses out as Morgan Stanley argues current spreads offer inadequate compensation for the additional risk.

Put it all together and Morgan Stanley isn't telling investors to take less risk. It's telling them to take it somewhere else.

That means less Australia, more global equities, more inflation protection and, for those who can access them, more alternatives.

For Australian investors, it's certainly food for thought.