The benchmark S&P/ASX200 will finally hit 6000 points but not before the end of next year, as corporate profits rise for the time in three years, Credit Suisse predicts.
Developments in China and the US are expected to make waves among Australian equities, along with local factors such as superannuation reform.
In a report released on Wednesday, Credit Suisse outlined five trends that will dictate the state of the Australian sharemarket through 2017.
Global reflation trade
The investment bank's economists expect next year to deliver the fastest rate of global growth in six years, with nominal GDP expansion up to 6.8 per cent from 5.6 per cent this year.
The policy proposals of President-elect Donald Trump have boosted already strong growth in 2016, both of which are expected to continue into the next year, they said.
In response, US 10-year treasury yields have climbed 2.4 per cent over the past six months, with analysts expecting a high of 3 per cent by the end of next year.
The negative relationship between bond yields and stock indices has given rise to the reflation trade in which investors ditch bonds and snap up commodities and stocks set to benefit from inflation.
The global Purchasing Managers' Index and the US and Australian government bond yield curves have yet to reach their cyclical peaks, suggesting the reflation trade has a way to go.
Aussie profits recover
Earnings per share on the ASX 200 will rise for the first time in three years, the Credit Suisse analysts said.
The increase is expected to be about 11 per cent, which is relative to the extent of recession that preceded it and equivalent to the exchange's profits base growing by $10 billion to about $100 billion.
"An area of the equity market that may benefit as growth becomes less scarce are those previously unloved stocks," Credit Suisse analyst Hasan Tevfik said. "They trade on low multiples and tend to a have solid, if not spectacular, growth outlook."
Credit Suisse cites BlueScope, Caltex, Henderson, Metcash, Myer and Suncorp as examples.
Diminished super investment
The government's changes to the superannuation system – the biggest in over a decade – will apply from July next year.
The reduced limit in concessional contributions from $35,000 per annum to $25,000, and from $180,000 to $100,000 for non-concessional contributions, combined with the a new $1.6 million limit on assets being moved into the tax-free pension phase mean that less money will enter the national pension pool and in turn the equities market.
Credit Suisse analysts said that although there may be a rush of inflow before the new rules are implemented in July, the overall outlook for 2017 sees superannuation becoming less attractive as a savings vehicle.
Superannuation has historically played a major role in the Australian equities market, currently accounting for about 40 per cent of ownership.
A decline in superannuation investment could lower valuations for the average Australian company and lead to increased discounts on equity raisings.
Possible reform in China
"We believe reform will ultimately help China transition away from being a high investment economy to one where consumption is the dominant contributor to growth," Mr Tevfik said.
Although reform will stagnate for most of 2017, the 19th Communist Party Congress in September/October will herald an unusually high amount of leadership changes, after which the reform process will reignite.
Almost two-thirds of senior Communist Party Politburo members are expected to retire along with 40 per cent of provincial leaders.
Analysts expect the government to mandate the merger of state-owned enterprises, in turn cutting coal output by these companies by up to 800 million tonnes by 2020.
The financial system is also expected to see reform, with the government liberalising the foreign mergers and acquisitions process for Chinese companies and allowing increased foreign ownership of Chinese equities, beginning with this week's tech-laden Shenzhen-Hong Kong Stock Connect.
Global yield frenzy draws to a close
Aussie equities will suffer disproportionately as the global search for yields cools, the Credit Suisse analysts predict.
"The global financial crisis ushered in an extended period of low deposit rates and government bond yields which has been a fertile backdrop for the global search for yield," Mr Tevfik said. "However, we believe higher bond yields and cash rates could mean a reversal of this trend."
Due to their high dividend yield, Australian companies will become less appealing to investors as bond yields climb.
The local equity market may even de-rate if investors flee in large enough numbers, he said.
Companies less vulnerable to this trend are those with positive dividend per share momentum and payout ratios which are not too high but still provide a sizeable dividend yield, such as ANZ, Eclipx, Fletcher Building, Lendlease and Wesfarmers.
