Australian stocks have enjoyed a solid run recently.
The ASX 200 has added 4.5% from October 5, leaving the benchmark index at a six-month high.
It’s been an impressive run, and one that Citibank says has been driven by a multitude of factors.
“The Australian market has jumped around 5% in recent weeks… finally responding to the now widely recognised broadening in the global recovery,” says Tony Brennan and Mark Tomlins, researchers at the bank.
“Commodity prices have held up, and company analysts have upgraded resource sector earnings, adding a couple of percent to market earnings growth in FY18.
“Confidence about the local economy has likely also benefited, even with indicators still patchy, encouraging investors with limited interest recently back into the market.”
Along with improved sentiment, stronger global economic conditions and analyst upgrades, seeing Australia’s benchmark stock market index play catch-up to gains seen in other major markets, Brennan and Tomlins say that optimism over potential US tax reforms — something that has undoubtedly helped to underpin gains in US stocks — has also helped Australia’s market.
“A number of Australian companies have meaningful US operations and their group earnings could benefit, we estimate perhaps in the order of up to 10% directly, with a possible further benefit in AUD terms if the USD strengthens,” the pair say.
Brennan and Tomlins acknowledge that the tailwinds for earnings may not be as large as that given the potential for the tax reforms to be watered down.
While the progress of US tax reforms will remain a major swing factor not only for Australian but global stocks in the period ahead, Citibank remains confident nonetheless that the recent form in Australia’s market will continue into 2018, forecasting that the ASX 200 will breeze past 6,000 points, leaving it at a 10-year high.
“In this environment, there would seem scope for the market to continue to move higher in the shorter term, with spot commodity prices suggesting more earnings upside, and possible further support if the USD strengthens relative to the AUD, and US tax cuts occur,” say Brennan and Tomlins.
“Our forecast remains for the ASX 200 to rise above 6,000 and reach 6,250 by mid next year, though thereafter we would envisage more limited gains, with medium-term earnings growth still looking only moderate and market valuation not low, and even risk of a correction with interest rates likely to be rising.”
The ASX 200 currently trades at 5,903.2 points.