Investing.com-- Morgan Stanley remains cautious on the near-term outlook for Asia and emerging market (EM) equities, citing lingering tariff uncertainty and earnings downgrades, but expects conditions to improve into 2026 as the US dollar weakens and global interest rates fall.

Morgan Stanley’s economists see Asia’s GDP growth slowing by 90 basis points from Q4 2024 to Q4 2025 due to trade tensions and slowing US growth.

While recent tariff reprieves between the US and China helped ease market stress, uncertainty persists and continues to weigh on business confidence and capital expenditure, analysts said.

Morgan Stanley expects the Federal Reserve to hold rates steady through 2025, with cuts starting only in March 2026. In contrast, most Asian central banks are forecast to ease policy amid subdued inflation and stronger regional currencies.

The firm favors domestic demand-led markets like India, Singapore, and Brazil, while maintaining a neutral stance on China and cautioning on Korea and Taiwan due to export risks.

India remains the top "overweight", supported by macro stability, policy continuity, and forecast earnings growth of 14% in FY26 and 16% in FY27, Morgan Stanley said.

Brazil was upgraded to overweight on the back of high return on equity, compelling valuations, and tailwinds from a weaker U.S. dollar, analysts stated.

In contrast, China stays equal-weight. Morgan Stanley favors large-cap tech and industrial leaders but sees lingering risks from deflation, weak external demand, and policy uncertainty.

Korea and Taiwan remain underweight as the firm awaits clarity on tariffs and sector-specific pressures in semiconductors and hardware, according to Morgan Stanley.

In Japan, Morgan Stanley lowered its overweight stance slightly due to expected yen appreciation, but maintained a positive view on domestic-oriented companies benefiting from corporate reform and nominal reflation.

A June 2026 TOPIX target of 2,900 implies 6% upside, analysts added.