Australia’s stock market is seen edging higher in 2017 and into the next year, a Reuters poll found, supported by broad optimism that has swept global equities in recent months though some analysts see risks from any aggressive U.S. interest rate hikes.
The benchmark S&P/ASX 200 index closed at its highest in nearly two years on Tuesday, underpinned by hopes regulators will tighten the screws on mortgage lending to hose down a heated housing market.The rapid surge in house prices over the past few years has raised fears of a property market crash, so the tighter rules are seen as tempering those risks.
While concerns still persist around the housing market, a strong rally in iron ore prices and the Reserve Bank of Australia’s optimistic view about the economy have kept investor sentiment high. The improved confidence has been supported by a rally in global stocks this year thanks to expectations U.S. President Donald Trump will cut taxes and ease financial regulations, which have pushed U.S. shares further into record territory.
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According to the latest poll of 15 strategists, taken over the past week, the Aussie index is expected to rise 2 percent this year from Tuesday’s close of 5,821.23. That would mark the fourth straight quarterly Reuters stocks poll in which respondents have predicted a strong 2017 for Australian stocks. The index is expected at 5,800 by mid-2017 and then rise to 5,950 by the end of the year before continuing its climb above the 6,000 barriers by mid-2018.
Sentiment has also been boosted by a sharp rebound in Australia’s economy in the fourth quarter of 2016, as commodity exports boomed while consumers and the government lifted spending, extending the resource-rich nation’s 25-year streak of uninterrupted expansion. But spiking bond yields and concerns about the pace of interest rate hikes in the United States are seen as the greatest risks facing the expected rally.
The Fed’s widely anticipated rate hike earlier this month was only its third since the global financial crisis. But it came earlier than what markets had expected only weeks before and has set the stage for two more increases this year as the U.S. economy strengthens. “The pace of U.S. monetary policy normalisation will need to be accelerated to accommodate the improving economic fundamentals – particularly in light of a much tighter U.S. labour market,” said Andrew Tang, equity strategy analyst at stockbroker Morgans.
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“We see higher global bond yields as a tipping point for equity markets towards the end of 2017.” When asked about the likelihood the Australian index falls 10 percent by the end of the year, most strategists said such a drop was likely. “We have had four 10 percent or more pullbacks since the GFC (global financial crisis), that is four pullbacks of 10 percent in eight years. Since 2002 there have been seven pullbacks of 10 percent or more, suggesting a 50 percent chance,” said Damien Hennessy of Heuristic Investment Systems.
“Causes could be the more rapid hike in Fed funds, Chinese slowdown, and European politics.” (Reporting and polling by Benjamin Weir and Tom Westbrook in Sydney, Shashwat Pradhan and Rushil Dutta in Bengaluru; Editing by Rahul Karunakar & Shri Navaratnam)