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The Australian share market is expected to lift by up to 15 per cent in 2010, after posting its best gains in 16 years as the domestic economy continues its recovery from the global financial crisis.
The benchmark S&P/ASX200 index hit a global crisis low of 3,121 points during intra-day trading in March 2009, but has since trended upward and closed at 4870.6 on December 31.
CommSec chief economist Craig James said the gain of nearly 31 per cent since January was the best gain in 16 years.
"We believe that the global economy is in healinged mode at the moment, but it will take some time to get back to full health," Mr James said.
There are still questions over the shape of the economic recovery in the United States, but in Australia the economy is being driven by China and strong population growth.
"So we're looking for the S&P/ASX200 index to reach 5,300 points by mid-year and 5,600 by the end of the year," Mr James said of the market's likely performance in 2010.
However, Mr James warned that when investors pile back into a market they can drive up valuations by too much.
"So what we need to see now is some validation coming from (company) earnings," he said.
"The next opportunity to basically see that is February when we get the next earnings season."
Mr James expects a recovery in 2010 in investor appetite for sectors such as real estate and diversified financial stocks - which were both sold off heavily during the global financial crisis.
Retailing stocks are expected to make more sedate gains, given that base lending interest rates are expected to rise further over 2010.
Investors might switch away from banking and resources stocks, which had underpinned the market's recovery in 2009, to a broader range of stocks.
Mr James warned there was still potential for "speed bumps", particularly in terms of the financial system and banks, because there were still foreclosures and bad loans to be worked through.
AMP Capital Investors chief economist Shane Oliver also expects the stock market to reach 5,600 points by the end of 2010.
"In other words, another reasonable year but not quite as strong as we've had because what we've seen in the last few months is a recovery from the panic low," he said.
The current bull market phase will be driven by corporate earnings growth.
The market is likely to be more volatile, with the Reserve Bank of Australia expected to announce more interest rate rises, perhaps as soon as February.
Dr Oliver said the domestic economic recovery had a lot further to go but would underpin solid growth in company profits over the next 12 months.
"That, combined with the fact that interest rates are still relatively low and there is a lot of cash sitting on the sidelines, there's plenty of fuel to push the market higher," he said.
Policy issues would shift toward the timing and speed of the removal of economic stimulus packages that governments around the world had introduced to contain damage from the global financial crisis.
For Australia, policy issues would move away from the crisis management of early 2009 toward such things such as the housing shortage.
Dr Oliver said there was still some potential for shocks during 2010.
"There's still the after-effects of the banking crisis in the US - that's going to no doubt throw up a few losses here and there, and it's also possible that a few countries around the world might announce problems," he said.
"But I think the bulk of the damage from the global financial crisis is already out there."
General manager of investments at Zurich Financial Services Australia Ltd, Matt Drennan, said the sharemarket had already made the easy gains from its oversold position back in March.
"The issue we really need to see come through to take the market to the next level is sales growth," he said.
"There are some signs of that coming through, but I suspect it will take a little while because some of the sales have been artificially stimulated from the government's stimulus package.
"But I think in the next 12 months, we can get to about 5,500 points on the All Ords (All Ordinaries index), which is reasonable gain from here."
Sales growth would probably be driven by the strength of the domestic economy and China.
"Domestically, we're still in pretty good shape," he said.
"Unemployment will probably peak at the mid-six per cent levels, we've got a very good underlying banking system with no real serious bad debt problem.
"So consumers will be relatively confident as we move into 2010 and the stimulus gets withdrawn. There's enough self-sustaining momentum for them to keep on spending.
"There will also be continued strong demand for resources out of China."
Mr Drennan said is sceptical about the US as a source of growth because there was no real firepower left.
"They've got interest rates at virtually zero. They've got to begin withdrawing the stimulus at some point," he said.
"And of course, they've got all the negatives that we don't have: their banking system is still extremely fragile, their bad debt levels are much worse; their unemployment's over 10 per cent and probably hasn't peaked yet."
The global financial crisis also generated plenty of merger and acquisition opportunities in Australia and overseas, especially in the hard-hit banking and insurance sectors.
With China still needing to "bulk up" on resources, junior Australian resources companies remain potential targets.
Mr Drennan said there could be some more secondary shocks from the global financial crisis.
"Even if you believe that the US is still very fragile and that it might be a source of further shocks, its impact on Australia is probably going to be far less than it was in the past because our links to Asia and particularly China are so much stronger," he said.
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Source:By Trevor Chappell
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