CONSENSUS is beginning to emerge among economists and market analysts that the recovery in the Australian sharemarket will be sustained, and some brokers are encouraging their clients to start buying now.
The S&P/ASX 200 Index kept up the previous week's rally for the first hour yesterday, hitting an intraday high for the year of 4083 points, but then started to slide. It closed with a gain on the day of just 0.4 of a point, at 4050.7.
Many attributed the sell-off to profit-taking after a five-day rally. Investors are expecting an improvement in sentiment once earnings results for the June half-year are known.
Yesterday's biggest gainers were nickel miner Mincor Resources, up 20 per cent because of high production volumes, and Panoramic Resources, up 10 per cent after the board approved a 12 million share purchase by Brilliant Mining.
Shares in homewares retail giant Harvey Norman declined after it reported that its sales in Australia were weaker than expected and that its stores in Ireland were all losing money.
Investment bank Credit Suisse believes that, while macro-economic indicators suggest the domestic economy will be weak for the next three months, the market is unlikely to fall much further and could rise by as much as 50 per cent over the next 12 months.
"We believe investors should start pricing in (eventual) recovery today," Credit Suisse said yesterday in a research note. "In financial year 2010-11, we can see significant [earnings per share] upgrades as world recovery drives commodity prices higher, and as easier financial conditions support stronger credit growth."
Their bullish outlook is based on expected increases in credit growth and commodity prices, and strong house prices — supported by the first home owners grant.
"Ninety per cent of people are still employed, and as a result of their higher asset prices, they tend to offset the pull-back in consumption that is resulting from higher unemployment," Credit Suisse analyst Adnan Kucukalic said yesterday.
Minutes of the latest Reserve Bank board meeting were similarly optimistic, though wary of inflation in economies with high government debt, such as the US and Britain.
"Both consumer and business confidence had rebounded strongly from their low points," the minutes stated. "The outlook thus remained for a gradual recovery to begin later in the year."
The RBA said it might reduce rates in the future, but Australian banks do not think the overnight target cash rate, on which borrowing rates are based, will go below the current 3 per cent.
"We appear to be getting to the bottom end of the interest rate cycle," said Westpac chief executive Gail Kelly. "The market on the whole is beginning to expect rates to go up."
The confident outlook is also encouraging investment funds to rethink their asset allocation.
"We are reviewing equity positions in light of recent economic data and stabilisation of financial markets," said William Keenan, senior equity strategist at research firm Lonsec. He added that the market had already priced poor earnings for the past 12 months into current share prices.
