"While the macro outlook remains challenging in the medium term, a middle-ground fiscal expansion is likely to come as a relief to markets," analysts at the U.S. bank said in a note on Monday.
Morgan Stanley reckons the budget, due to be announced on Sept 27, will target a deficit of around 2.2 percent.
The bank acknowledged Italian debt remained vulnerable to shocks and described itself as cautious on the long-term structural demand for BTPs, as Italian government bonds are known.
But "with possible near-term upside we recommend investors to position via a tactical long in 10y BTP versus Bono," it added, referring to Spanish government bonds.
Morgan Stanley also sees Italian stocks as too cheap relative to bond spreads, and said base case forecasts suggested a 12 percent re-rating potential for MSCI's Italy equity index.
It said it was overweight on banks Mediobanca and UniCredit and saw value in Intesa Sanpaolo shares at current levels.
(Reporting by Danilo Masoni; editing by Sujata Rao)