Markets: Up, up and away

Deutsche Bank expects the local stock market to rise in line with earnings gains of 7-8 per cent in 2014.

Stocks are trading a touch above their 20-year average. Can the stock market rise further?

Deutsche Bank thinks so. Its Australian strategist Tim Baker thinks the broad market can rise another 7-8 per cent from current levels, in line with what he suspects will be corporate Australia’s 2014 earnings growth. That would put the S&P/ASX200 Index at 5499.803. The index is already up 17 per cent in the last 12 months. Is Baker’s forecast realistic?

Baker’s argument is simple. Resources and domestic cyclical stocks have been left behind in the market rally. They will catch up. Money that Baker sees in the market that, in his words, have been devoted to a “crowded trade,” notably bank, health care, consumer staples, REITs and Telstra, may cull their position in such shares and put it in mining, construction and building materials stocks.

There has been a sea change in perceptions about China’s economy, says Baker. Instead of gloom and doom, commentary is now dominated by perceptions the world’s second-largest economy is stabilising even improving.

No better example is the iron ore price. Spot iron ore imported through the northeast Chinese city of Tianjin has defied scores of analyst predictions by rising 25 per cent since May 31 to close yesterday at $US138.30.

Scott Mailer, who sits on Deutsche Bank’s Melbourne trading floor, sees money flow into pure play iron ore miner Fortescue. He also sees money going into Woolworths, CSL and Sonic Healthcare as well as Arrium and Harvey Norman.

Mailer notes that despite the widespread use of such terms as ‘challenging’ and ‘difficult,’ profits in the June reporting season were just 0.5 per cent below forecasts. Dividend payout ratios will increase in 2014. That helped the S&P/ASX200 Index beat out the MSCI AC World Index by 3 per cent this month.

All good, as some may say. But markets, as Baker concedes, tend to take into account a version of the future. Such fundamental improvements may already be in share prices. After all, chief executives such as BHP Billiton’s Andrew Mackenzie have been loudly proclaiming their new, lean, mean cost-focused operations that by and large shun large capital expenditure.

Since May 3, around the time Mackenzie became BHP’s chief executive, the company’s stock is up 11 per cent. Rosy predictions about the stock market may already be in share prices.