Macquarie sees better times ahead for Australian stocks in 2017

MELBOURNE, AUSTRALIA – AUGUST 13: Luke Parker of the Swans jumps over Daniel McKenzie of the Saints during the 2016 AFL Round 21 match between the St Kilda Saints and the Sydney Swans at Etihad Stadium on August 13, 2016 in Melbourne, Australia. (Photo by Adam Trafford/AFL Media/Getty Images)

There hasn’t been much to crow about for Australian stock investors in 2016.

The ASX 200 index is currently up 3.3%, a modest return in anyone’s language, even forgiving that this figure doesn’t include dividend payments to investors.

However, things are about to get better, says Macquarie Wealth Management, forecasting that the index will finish 2017 at 5,875, up 7.5% from its present level.

“2016 was about navigating downside growth risks,” it said in research note released on Tuesday. “2017 will be about how quickly these drags reverse.”

ASX 200 Daily Chart. Source: Thomson Reuters Eikon

Macquarie’s call is premised on three main factors: an improvement in the Australian economy, a preference from investors to invest in stocks rather than bonds, along with a solid lift in corporate earnings, something that it says comes courtesy of years of lowering operating expenses, now commonly referred to as “cost out”.

“Australian equities will trade 7.5% higher in 2017, supported by a gradual improvement in the domestic economy and as risk taking behaviour remains supportive for equities over bonds,” it says.

“Australian corporates are lean as years of uncertainty and weak top line growth have driven an intense focus on lowering operating costs and financial leverage.

“We expect around 10% EPS [earnings per share] growth as leverage finally begin to work in reverse.”

While that’s Macquarie’s view on the broader ASX 200, they are not expecting an even performance across individual sectors, suggesting that cyclicals will outperform rate sensitives, value will outperform growth and that large caps will outperform their smaller peers.

“2017 will not be a year for absolute returns but relative returns,” it says, noting that intra-market and asset class performance “will be highly dispersed”.

It says that Aristocrat Leisure (ALL), BHP Billiton (BHP), Incitec Pivot (IPL), Link Administration (LNK) and Qantas Airways (QAN) are its top picks for 2017.

And here’s what sectors Macquarie prefers at preset. Notably, its says investors should carry overweight positions in the banks and miners, two sectors that account for over 50% of market capitalisation in the broader ASX 200 index.

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