The ASX200 can still climb by another 10% this year, says Credit Suisse

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  • Credit Suisse is maintaining its year-end target of 6,500 for the ASX200 — a gain of more than 10% from current levels.
  • The bank’s equity analysts say the current earnings expansion phase won’t be derailed by a slowdown in global growth.

Credit Suisse says Australian stocks represent a buying opportunity, despite recent concerns about the outlook for global growth.

And by sector, analysts Hasan Tevfik and Peter Liu like the look of mining and energy stocks. The pair recently moved back to an overweight position in commodities by adding South32 to their portfolio.

Most global stock indexes have receded from their January highs since the market turmoil in early February. And the ASX200 — which has lagged its global counterparts in recent years — hasn’t been immune, having fallen by around 6% in that time.

More recently, there’s been mounting evidence that the synchronised global growth picture — most prevalent towards the end of 2017 — is now losing momentum.

Earlier this month, the JP Morgan-IHS Markit Global All-Industry Output Index — a measure of manufacturing and services PMI activity — fell to its lowest level in 16 months.

But Tevfik and Liu said that since the September quarter of 2016, Australian equities have been in the earnings expansion phase of the current market cycle.

And the current phase is unlikely to be derailed by a slowdown in global growth, because other external supportive factors are still in play.

“The outlook for Aussie profits remains solid and supported by (1) accommodative monetary policy, (2) solid demand in China (3) recovering business investment and (4) expansionary fiscal policy in the US,” the pair said.

They noted that in the previous ASX200 earnings expansion from 2010-2014, the US ISM manufacturing index fell from a reading of 59 to 49 towards the end of the cycle.

But Australian earnings per share (EPS) continued to rise for another year or so:

“Previous earnings expansions have delivered periodic occasions to buy-the-dip and we think Australian investors are again provided with such an opportunity,” the analysts said.

While the growth drivers highlighted above are still in place, the downturn from January’s high means equity valuations now look more attractive.

By sector, Tevfik and Liu said the best bargains can be found among Australia’s commodity producers, which have strong balance sheets and offer the prospect of higher capital returns.

And based on the valuation metric of free-cash-flow (FCF) yield per share, ASX200 commodities stocks also offer a particularly attractive valuation:

The analysts are sticking to their year-end target of 6,500 for the ASX200 — a gain of around 10.1% from current levels.

A short time ago the local index was up by 0.5% and closing in on 5,900 in midday trade, led by gains in commodity sectors after oil shot higher overnight. Base metals and iron ore also climbed.

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