ASX global catch-up to pass 6,000: Citi

Prashant Mehra
(Australian Associated Press)

 

The Australian share market’s recent gains could still have some way to run, with the index headed to well above the 6,000-level in the near-term, according to an analysis by Citigroup.

The benchmark S&P/ASX200 index, currently trading in the low 5,900s range, has jumped more than 250 points, or 4.4 per cent, in October alone.

The local market is now starting to reflect the broader global recovery, and a number of domestic and international factors could play a part in its continuing run, Citi’s head of equity market strategy Tony Brennan says.

“There would seem scope for the market to continue to move higher in the shorter term, with spot commodity prices suggesting more earnings upside, possible further support if the US dollar strengthens relative to the Australian dollar, and US tax cuts occur,” he said.

He expects the ASX200 to reach 6,250 by mid-2018, but gains likely to be more limited thereafter.

Underpinning the improved prospects has been an upgrade in expected earnings since the latest profit reporting season ended, particularly for the resources sector.

Since September 14th, analyst estimates for overall 2017/18 earnings per share (EPS) growth for ASX200 companies have risen from 3.7 per cent to 5.3 per cent, according to the Citi report.

Within this, expectations for EPS growth for resources companies have jumped from 0.3 per cent to 5.8 per cent, on the back of higher-than-anticipated commodity prices.

“Resource earnings remain the more variable component of market earnings and our analysis indicates more upward revisions would be implied by the persistence of current commodity prices, even with the important iron ore price well down from earlier highs,” Mr Brennan said.

While commodity prices are volatile and analysts remain sceptical about assuming that current prices will persist, the broad-based upswing in the global economy could help sustain support.

In addition, confidence about the local economy has improved, luring investors back into the market, despite some economic indicators – such as retail sales, wages and inflation – remaining subdued.

Still, the gradual cooling in housing activity and strong growth in employment has lifted hopes for steadily improving growth in Australia.

The other significant development has been the renewed prospect of US tax reform, which could benefit Australian companies with meaningful US operations, Citi says.

Some details for the tax cut plan, which is backed by US President Donald Trump, are expected to be unveiled in legislation later this week.

The plan includes cutting the US corporate tax rate to 20 per cent from 35 per cent, and the top individual rate to 35 per cent from 39.6 per cent.

“The proposals appear substantial but the details are still sketchy, and agreeing on funding and an overall package seems likely to be difficult,” the Citi analyst says.

But, if the reform does go through, it could help lift earnings for some Australian companies, such as James Hardie, BlueScope Steel and Cochlear.

“There could be a direct benefit to earnings of up to 10 per cent for companies, and a further benefit in local currency terms from the US dollar strengthening,” Mr Brennan said.

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