Morgan Stanley has picked Japan as a key growth market for 2025, while expressing concerns on China's economic trajectory amid higher tariffs, according to a Monday outlook report.

The equity research firm's preference for Japanese equities considers its views on opportunities tied to reflation and yield curve steepening.

Japanese sectors such as financials and real estate as well as global players focused on defense and capital goods should perform well, according to the research firm.

Conversely, Morgan Stanley expects China's growth to underperform and impact the overall outlook for emerging markets.

The equity research firm sees China's domestic stimulus as positive, but uncertainties regarding the pace of the US tariffs abound.