Is it safe to take the plunge?

SHARES are primed to rally up to 11 per cent higher by year's end as the global financial turmoil eases, investor confidence returns and local companies deliver on their profit promises, market experts say.

As a sign of this growing optimism, retail stockbrokers are reporting that their phones are starting to ring again after some lean years for the industry, while financial planners say their clients are also starting to shift back to more normal equity weightings.

Shares are no longer completely on the nose for small investors, as witnessed last week by the strong overall 2.6 per cent gain in the S&P/ASX 200. Since the start of the year, the index is up 6 per cent.

That's not bad going, until you realise the sharemarket is no higher now than it was last August - and was also at this level in late 2008. The principal rule of share investing is that it's for the long term. But if you had parked your money into shares five years ago, you would have lost about a third of that investment by now.

No wonder that in the past couple of years mum and dad investors have sold out of the sharemarket and moved to the safety of term and cash deposits, which at least guarantee some annual return and no losses.

But Simon Bond, partner at stockbroker RBS Morgans Newport, says the flow of money is starting to turn again. It's a dribble back to shares but if it grows into a tsunami, stocks will take off.

"I think people are underestimating the level of underinvestment in shares right now, both here and overseas. There's an awful lot of money sitting in term deposits and fixed interest just looking for another home, and I would be definitely looking to get some of it back into shares right now."

Austock senior client adviser Michael Heffernan agrees. He's pencilled in 4800 points for the S&P/ASX 200 by the end of the year, a gain of 11 per cent.

"As long as we get fewer factor Xs - the cyclones, the tsunamis, the crisis in Greece, US debt ceiling issues - that derailed the market last year, we could be in for a very good year indeed,'' he says.

"There's great value in the sharemarket right now and valuations not seen for any length of time since the late 1970s. We've got sentiment improving, confidence returning and as long as Europe keeps off the front page, I believe we're on the way back."

Macquarie Private Wealth divisional director Lucinda Chan says investors are gaining confidence because the global outlook is improving.

"The market should head higher from here," she says. "The US is a good story with solid economic data over the past few months. We know China is pulling back a little bit, but 8 per cent growth I'll take any day. Europe's another story in that it's going to be a long haul from here and we've yet to see what these austerity measures will deliver, but I personally wouldn't be worrying too much about it."

Paul Moran, principal of Paul Moran Financial Planning, says the prospect of a financial catastrophe derailing markets now is about the same as before the GFC.

"That means we should be back to a normal market, with its normal ups and downs - and also normal sharemarket expectations."

Mr Moran tells his clients a normal return for shares is 10 per cent a year - 6 per cent or so from the dividend plus tax credit, and capital growth of a further 3 to 4 per cent.

"Dividend yields are extraordinary in the sharemarket right now and valuations very attractive - I'm starting to see some optimism and we are advising our clients to move back to a normal long-term weighting for shares."

So what to buy? Mr Moran recommends top-20 index funds because the blue chips offer such good value right now there is no need to take a greater risk with smaller companies. "Most of the top stocks are 20 per cent or so below their 52-week highs - and the news has got better over the past 12 months, not worse."

Mr Bond says internet-based stocks such as Seek, Webjet, Carsales.com and Wotif.com are doing well, as are the mining services and engineering companies such as Monadelphous.

Mr Heffernan likes mining services, too, including Mineral Resources and Boart Longyear, and also the four-wheel-drive accessories manufacturer ARB Corp.

Ed Prendergast, a fund manager for Pengana Emerging Companies, which invests in small-cap businesses, is particularly positive about the smaller end of the sharemarket right now, too, if investors are feeling brave enough.

"History shows that in every recovery, small caps significantly outperform larger stocks from the market lows - that's because they got hammered much harder on the way down," he says.

"That was certainly the case this time, but since January it seems like the selling pressure has started to lift on the small-cap sector and people are beginning to realise that some of these companies have real market prospects and potentially strong earnings delivery.

"We are at a good starting point, where prices are low and people have had little faith in their earnings. That's starting to change and we now have the ingredients for a reasonably good recovery from here."