Investment banks see solid gains for local market in 2014

'Tis the season for resolutions and repositioning, and investors will be looking longingly into the crystal ball as trading begins to die down and investment bankers enjoy the holiday season.

'Tis the season for resolutions and repositioning, and investors will be looking longingly into the crystal ball as trading begins to die down and investment bankers enjoy the holiday season.

After a turbulent couple of weeks amid speculation over a tapering of the US Federal Reserve's $US85 billion-a-month stimulus, investors will be hoping for more certainty next year and a return to earnings growth that disappointed in the recent reporting season.

The Australian economy has many sceptics, but most investment banks are forecasting solid gains for the ASX200.

Goldman Sachs, in its 2014 outlook, is forecasting a total return of 15.2 per cent by December 2014, implying the ASX200 will reach 5900. "Into [2015] we expect a lower $A and still loose monetary policy will help drive a more material pick-up in domestic activity," it said.

"We expect resource earnings (+20 per cent) to drive a recovery in 2014 as mining volumes increase. In 2015 industrials become the key driver of growth (accelerating to 14 per cent in 2015, from +7 per cent) as sales growth moves above trend."

The issue of tapering will continue to be at the forefront of investors' minds in 2014, with the US economy steadily improving, and the Fed will be keen to try to begin the management of the economy in a world with less quantitative easing.

"A significant back-up in US bond yields on market assumptions of a faster pace of QE stimulus withdrawal would likely flow through to domestic bond yields and pressure the valuations of high-yielding stocks, particularly the banks," UBS said in its 2014 outlook.

The Australian market's reaction to the first mention of tapering earlier this year could have arguably been a taste of things to come, but constant speculation of its timing should have prepared investors in the second half of the year.

"We think volatility surrounding tapering will be moderate rather than severe and any further bond yield selloff contained. However, market reactions are not always orderly and rational," UBS said.

UBS is forecasting the ASX200 to finish next year at 5700, giving a return of 11.3 per cent.

Much of the ASX200's ride this year has been on the back of strong growth from the financial sector, which surged 18.4 per cent. Price-to-earnings ratios suggest earnings growth is likely to be delivered from the mining sector, which underperformed the rest of the market this year, slipping 8.5 per cent.

However, UBS cautions that the mining sector has rarely shown the capacity to outperform against the backdrop of declining commodity prices, which are being forecast to slide next year.

"We continue to favour housing exposure. Building approvals are up strongly year-on-year, and commentary from companies has confirmed better conditions," Deutsche Bank strategist Tim Baker said.

"We see scope for this to continue for some time. Australia continues to record robust population growth, and has not built many homes for the better part of a decade."

Deutsche Bank is forecasting the ASX200 to climb to 6000 by the end of 2014, a return of 17.1 per cent.

Many company fortunes will be riding on a change in consumer attitudes and consumption. Household savings have been at elevated levels in recent years, and Australian households saved $99 billion this year, a saving rate of 10.8 per cent, according to Morgan Stanley.

Morgan Stanley head of investment strategy Malcolm Wood said he expected increased housing and consumer spending next year, lifting growth and profit margins.

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