Given all the doom and gloom in the markets right now, is it really possible that the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) could end the year at 5,500 points?
According to The Australian Financial Review, Credit Suisse and UBS both seem to think it can which offers a more optimistic view for local investors than what many other economists have offered recently.
Indeed, investors have faced much uncertainty so far this year. In January and February, news headlines were dominated by fears related to plunging oil prices, while the market's attention soon turned to the prospect of a 'Big Short' event in Australia which, it was feared, could see house prices crash.
More recently, Britain's shock decision to leave the European Union – dubbed Brexit – has caused major mood swings on the market, while uncertainty related to the inconclusive federal election has also played on the minds of investors.
All in all, it's been a topsy-turvy year for Australian shares so far. The ASX 200 is down 1.2% since the beginning of 2016, although it has traded as much as 11.1% lower (at 4,706 points) and as much as 2.5% higher (at 5,427 points) at one point.
As noted by The AFR, Credit Suisse believes that investors are discounting Australian shares based on a measure of trailing dividend yield, especially given that further stimulus from the Reserve Bank of Australia is expected in the wake of Brexit.
It noted that investors are now pricing in Australia's third-biggest dividend decline in the past 45 years with a 15% discount, which was topped only by the 25% discount during the global financial crisis and 30% during the early 1990s recession. That is despite the fact that Brexit may still be a couple of years away, as well as the fact that the actual terms of Brexit remain unclear.
Based on their target of 5,500 points by the end of the year, the ASX 200 could climb a little over 5% within six months. Keeping in mind that would exclude big dividends paid by companies such as Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS), 5% in six months is also a far greater return than what you could expect to receive from government bonds or a term deposit in this low interest rate environment.
Investors do need to take the 5,500-point target with a grain of salt and remember that investment banks do not have access to a crystal ball. That is to say, there is no certainty the market will rise to 5,500 by the end of the year.
Regardless of whether or not that does happen, now could still be a great time for long-term investors to stock up on shares of high-quality businesses – many of which are trading at a discount today. Two of the companies you could consider include Bapcor Limited – formerly known as Burson Group Ltd (ASX: BAP) – and Somnomed Limited (ASX: SOM), which both possess defensive characteristics as well.
