The Australian equities market is at the dawn of an expansion cycle where earnings at listed companies are growing, according to Credit Suisse.
And this prospect of rising earnings is behind analysts at Credit Suisse forecasting the ASX200 index to reach 6000 by the end of the year. Today, the index is still below 5800.
“Our global economists now forecast the fastest year of global growth since 2011,” write Hasan Tevfik and Peter Liu in a note to clients.
“The incoming US administration promises to stimulate an economy already enjoying considerable momentum. The Chinese authorities are expanding fiscal policy.”
In Australia, the rise in earnings per share has been concentrated in commodity stocks.
“But we expect it will broaden further as the global economic recovery takes hold,” the analysts write.
They say the bulk of the equity market gains over the long-term tend to be during earnings expansion periods. They expect 10% earnings per share growth on the ASX200 for the 12 months ahead.
This is the fifth Australian earnings expansion since 1980. This chart shows what to expect when averaging the impact of the previous expansions:
“Many of the potential beneficiaries of the current earnings expansion were out of favour just a short while ago,” the analysts write.
“We struggle to find a racy macro theme amongst the 15 stocks in our screen. Many of these companies are in declining industries and some have a history of being poorly managed.
“But they all trade at a discount to their history (on average 25%) and they are set to benefit from a relative re-rating.”
The stocks liked by the Credit Suisse team include ANZ Bank, Boral, Crown Resorts, international investment company Henderson Group and Nine Entertainment. Here’s the full list:
“For many investors, over the last couple of years, we think these companies were out of favour,” the analysts write.
“But now we think the smell emanating from this group of stocks is the aroma of positive alpha. It’s time for the ‘out of favours’.”