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Why the ASX 200 could hit 5,900 points before 2017

Compared to other markets around the world, it hasn’t been the greatest year for the local S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), but one expert thinks that could be about to change.

Michael McCarthy, chief market strategist for CMC Markets in Australia, recently reiterated his call for the ASX 200 to hit 5,900 points by the end of calendar year 2016, albeit “nervously”.

Although this sentiment was partially based on technical analysis, he also provided a number of reasons why shares could push higher – roughly 8.3% higher than today’s level of 5,447 points – before 2017.

What needs to happen?

First and foremost, there has been a remarkable turnaround in investor sentiment since Donald Trump became President-elect on 8 November (9 November, local time). What his Presidency will mean for Australia – and the global economy as a whole – remains unclear, but investors were certainly more encouraged after his acceptance speech, indicating that President Trump could be different from candidate Trump.

Despite a sharp drop initially, markets around the world have since rallied with the Dow Jones closing above 19,000 points for the first time overnight. The ASX 200 hasn’t been a huge beneficiary so far, but that could change if investors grow more comfortable with what Trump will bring to the table.

A number of other factors would also need to come into play for the ASX 200 to hit the 5,900-point target in the next five-or-so weeks. The US Federal Reserve would need to increase interest rates in the United States in December, helping to push the Australian dollar even lower. That, in turn, could attract more international buyers to Australian shares to push them higher, while commodity prices would also need to remain strong to support shares in the resources sector.

Will it happen?

While a push towards 5,900 is possible, I wouldn’t suggest investors bank on it. An 8% rise in just over a month is a lot to ask for – a fact that McCarthy himself freely admits. But he does have some support from analysts at UBS who believe a 5% gain is achievable for the ASX 200 by the end of 2017 – a figure that excludes the impact dividends would have on any returns booked by investors.

Unfortunately, predicting the movement of shares over a short period of time is difficult to do. Just consider the market’s response to Donald Trump’s recent victory in the US election. Most pundits expected shares to crash (which they did immediately after) before surging to new highs.

In other words, trying to profit from forecasts that suggest the market is ready to soar (or plummet, for that matter) is typically unwise. Investors would be better off ignoring the short-term noise and focusing on the bigger picture instead. That means concentrating on the fundamentals of businesses that you expect will be bigger and better in five or 10 years’ time.

That could mean investing in businesses such as Retail Food Group Limited (ASX: RFG). A business that has done a tremendous job of generating returns for investors over the past 10 years. Telstra Corporation Ltd (ASX: TLS) is a popular alternative among the more conservative investors, while others may prefer to back a higher growth business such as Class Limited (ASX: CL1).

Indeed, there are still plenty of businesses listed on the ASX that are either too expensive or are otherwise lacking the quality needed to justify a long-term investment. But despite the uncertainty facing the market, there are also plenty of companies worth considering.

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Motley Fool contributor Ryan Newman owns shares of Class Limited and Retail Food Group Limited. The Motley Fool Australia owns shares of Class Limited and Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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