From AI to alcohol-free: the forces shaping the winners and losers for 2025

Morgan Stanley’s analysts have released their mid-year outlook, offering insights into what’s driving markets, the economy, and key sectors like technology, banking, and retail.

Despite ongoing geopolitical uncertainty, Morgan Stanley’s team maintains a cautiously optimistic view on Australia’s economic growth. While the pace is expected to be somewhat subdued, further rate cuts from the RBA in 2025 are anticipated to stimulate activity, particularly in housing and residential construction.

Equity market valuations may appear stretched, but there are encouraging signs that consumer spending remains resilient - welcome news for the retail sector. Meanwhile, AI continues to dominate headlines and performance in global markets, though locally, Morgan Stanley’s analysts believe it’s still too early to identify clear winners.

Here are some of the key findings from Morgan Stanley’s mid-year deep dive, released ahead of the firm’s Australia Investment Summit in Sydney next week.

The market is fair value

Four global investment themes for 2025 - tariffs and deglobalisation, AI application, longevity, and the transition in energy - will be paramount to share price movements and portfolio positioning. 

While market volatility has been high, Australia has been seen as a resilient and defensive market by global investors. This has led to strong capital inflows and elevated valuations in domestic-facing sectors.

Despite the stretched valuations, the team believes the market is still trading at fair value on a 12-month view.

Equity Strategist Chris Nicol highlighted that sectors with domestic revenue exposure, like Australia, Japan, Korea, and Europe, are preferred due to their relative insulation from global trade disruptions.

Despite geopolitical uncertainty, Nicol advised maintaining exposure to structural growth and domestic resilience, while cautiously monitoring opportunities in underpriced sectors like resources if global growth conditions improve.

Australian economy pretty resilient

It’s a relatively positive outlook for the Australian economy, with expectations of it to grow from 1% in 2024 to 2% in 2025, bucking the global trend of slowing growth.

"We're expecting the global economy to slow by about a percentage point this year from three and a half to two and a half. We actually think the Australian economy moves in the opposite direction," says economist, Chris Read.

They anticipate the RBA will deliver two rate cuts this year, in August and November, and another in 2026, bringing the cash rate to 3.1%.

Unsurprisingly, rate cuts are expected to lift sentiment and activity in housing, and residential construction is already showing signs of recovery.

Affordability challenges persist; while borrowing capacity may increase, it's still well below pre-tightening levels.

Consumers want value, but more than anything, they want things fast

The current Australian consumer has a clear preference for saving over spending, says analyst Melinda Baxter. 

Consumers are increasingly looking for value, especially in their grocery shop, with more people comparing prices across stores and apps.

Promotional spending is now a key part of consumer behaviour, especially for bigger-ticket items, with shoppers delaying purchases for known sales events like Black Friday.

Despite looking for value, consumers are still willing to pay for convenience. Rapid delivery services where you can get your shopping cart in under 60 minutes are experiencing strong growth.

This shift is pushing retailers to invest significantly in digital platforms and supply chain infrastructure to meet rising expectations. Coles (ASX: COL), for instance, is spending over $1 billion on logistics upgrades.

Fascinatingly, what was first perceived to be a cyclical change is actually emerging to be a structural shift in how Australians consume food and alcohol, mostly driven by younger generations, in particular, drinking less and seeking healthier options.

Companies like Guzman Y Gomex (ASX: GYG) are seen as better positioned due to their healthier brand image. In alcohol, firms like Treasury Wine Estates (ASX: TWE) and Endeavour (ASX: EDV) are exploring low- and no-alcohol products, to meet the new consumer trend.

No winners or losers in technology…yet

Overweight stocks in Morgan Stanley’s coverage include WiseTech (ASX: WTC), Xero (ASX: XRO), REA Group (ASX: REA), Seek (ASX: SEK), and Telstra (ASX: TLS). The former four offer long-term capital growth potential, with 20–40% upside, while Telstra provides income and defensive exposure.

Looking ahead to the Summit, analyst Andrew McLeod highlights AI as the defining theme. While winners and losers aren’t yet clear, AI is widening the risk profile for TMT (technology, media and telecom) stocks.

Companies are actively integrating AI into products, such as REA and Seek improving search functions, or Xero launching its assistant, JAX “Just Ask Xero”. Whether an integration like this will hold up against, say, an AI tax agent, is yet to be seen.

In terms of Australia's tech future, McLeod sees strong growth for software firms (not chipmakers), because of their ability to scale globally in niche verticals, such as WiseTech’s freight platform.

Are the banks on borrowed time?

It was a cautious view on the major Australian banks. While share prices remain resilient, several tailwinds from 2024, such as strong margins and capital management initiatives, are fading.

Among individual stocks, Westpac (ASX: WBC) is underweight-rated despite a strong 2024, facing mortgage challenges, and ANZ (ASX: ANZ) is expected to see flat cash profit in FY25 and a decline of approximately 5% in FY26. On Commonwealth Bank's (ASX: CBA) ever increasing share price rise, Head of Australia Research Richard Wiles flagged the stock’s record-high valuation (28x P/E) as unsustainable given modest growth and returns, advising an underweight position.