The current rally in Australian shares, up about 10% from Brexit lows a month ago, is soon expected to stall.
“After the sharp rally in Aussie equities we forecast sideways markets in the near term,” write Credit Suisse analysts Hasan Tevfik, Damien Boey and Peter Liu in a note to clients.
“Further upside is capped by a combination of testing valuations and broader macro concerns.
“The downside is also capped, in our view, as the global-search-for-yield will continue to bring investors to Aussie equities.”
Credit Suisse has lowered its December 2016 ASX 200 target to 5500.
In its quarterly outlook report, Credit Suisse says there are two issues which may cap index levels in the near term.
“First, is valuation. The trailing PE ratio is verging on 18x,” the analysts write, saying the last time it was at this level was pre-GFC.
“Our second concern is the growth outlook. Our global economists have shaved their forecasts post Brexit. In China too we have recently downgraded forecasts.
“In addition Aussie domestic demand could be held back as the housing market softens.”