Nikko AM's Brad Potter predicts a 15% total return on Australian shares in 2017

Getty/ Uriel Sinai

Australia’s share market is poised to have an even stronger year than 2016 thanks to resurgent commodity prices and the potential for bank stocks to rally further, according to Nikko AM’s head of Australia equities, Brad Potter.

Potter believes the market could beat last year’s figure by as much as 3%, to finish the 2017 at 15%, based on a dividend yield expectation of 4.5% and earnings per share growth in the high single digits.

The nation’s banks, despite their recent rally, are still relatively cheap, Potter said, given they are expected to cut costs and benefit from rising global inflation.

The gap between earnings and bond yields is still wide and this could continue to drive mergers and acquisitions this year as companies look to tap cheap debt, he said.

Improved returns will be driven by investor moves to cyclical stocks such as miners and away from bond proxies such as real estate investment trusts and utilities, Potter believes. While 2016 saw an earnings per share decline of 11% driven by resources stocks, the outlook for 2017 looks better, especially for miners looking at a windfall from surging iron ore prices.

The Australian market, ex-resources, is forecast to grow earnings by 4.9% in 2017 and 6% in 2018, Potter said.

Iron ore prices should settle lower than current prices as supply from Austrealia and Brazil increases and deamand from China reduces, but miners will reap the benefits of the price surge this year, he believes.

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