'Scary' optimism prompts market warning

Tim Rocks, the managing director of global research at Bank of America Merrill Lynch, yesterday said the market would lose nearly 7 per cent in value this year a figure that flies in the face of other market predictions as stifling financial conditions, continued dismal earnings forecasts, and a troubled US economy combined to depress the sharemarket, dragging it down to the 4000 points mark.

If that were to happen, more than 12 months of gains would be wiped from the market, leaving the S&P/ASX 200 Index up just 0.4 per cent on November 25 (when it closed on 3984.3 points).

The former Reserve Bank official said one of the major reasons for his prediction had to do with analysts' "incredibly over-optimistic" earnings forecasts.

"Earnings forecasts remain scarily high, both for the remainder of this financial year and for the 2012-13 financial year," he said. "That failure of earnings forecasts has been one of the key reasons why the Aussie market has massively underperformed global markets."

And in a further blow to Australia's ailing property market, Mr Rocks said building activity would probably worsen before it improved.

"Building activity in particular will go down further before it goes up, and a lot of that is [due to] financial conditions in aggregate, particularly including the Australian dollar, [which] remain very tight," he said.

Contrary to some economists, Bank of America Merrill Lynch's US economics team believed the US economy would fade this year, and this would further depress local shares, he said. Mr Rocks' view runs counter to the end-of-year targets for the S&P/ASX 200 Index from other financial houses.

The head equity strategist at Citi Australia, Tony Brennan, yesterday said the Australian sharemarket would probably finish the year up 450 points to 4750, an increase of 10.5 per cent from today.

And David Cassidy, UBS head of strategy and quantitative research, said the index would likely rise to 4700 points by year's end, an increase of 9.3 per cent.

"This target assumes a price to earnings rerating of the ASX200 from currently 11.2 times to 12 times by year-end, and also assumes a downgrade of 5 per cent to aggregate forward earnings expectations for the ASX200 by year-end," he said.

In what will be a crucial week for global equity markets, the International Monetary Fund will tomorrow release its global financial stability report, providing a snapshot of the health of the global economy.