Here’s a fantastic chart from the strategists at Credit Suisse this week:
The black lines are all the Australian bull markets since 1950; the red lines are the subsequent, or preceding, bear markets.
The current bull market is the smallest of them all. That leads inevitably to the conclusion that there is a lot more bull to come. Tevfik’s target is 6500 for the ASX200 by December 2018, but that’s understandably conservative. It could quite easily be a lot more than that.
A lot depends on what the Reserve Bank does, since the start of a new monetary tightening cycle always leads to a de-rating of equities – the question of when the RBA starts hiking is crucial.
Paul Bloxham, who I interviewed for Talking Finance this week, is predicting second quarter 2018 for the first hike. Bill Evans says there’ll be nothing till 2019. I’m with Bill, especially after this week’s benign statement from the RBA and yesterday’s Monetary Policy Statement.
But perhaps the cautious approach would be to plan for something in between – 3rd or 4th quarter next year.
Apart from that earnings have been in recovery mode for a year and there is now a rising tide of profits. This will continue to be supported by synchronised global growth, and continued stability and growth in China leading to an accelerating tourism boom, as well as resources exports.
Here are two more important charts from Credit Suisse:
The first chart shows that the average earnings expansion lasts for 5-6 years, with a valuation (PE) expansion in the last two years turbo-charging share prices for the final “blow-off” of the bull market.
This bull market is less than two years old, and the earnings expansion underpinning it is one year old, with the six month difference being the “decoupling” period, when share prices anticipate the coming earnings expansion.
Credit Suisse’s outlook is for 6-7% eps growth in 2018 and the same in 2019 – basically the average of previous earnings expansion cycles.
If the average experience applies to share prices (see Figure 5 above), that means the bull market has 3-4 years to run and that prices will rise another 60% or so.
That would see the ASX200 at 9,600 in 2020-21, and the accumulation index (total return) close to double.
That’s if things run normally.