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Why this top broker is forecasting a solid run for Australian shares through to April

The period of lacklustre growth for our economy is coming to an end with Australia’s growth engine revving up in 2018 which will power our share market to fresh 10-year highs over the next three months, according to a forecast by Morgans.

The broker is very bullish about growth and equities. It believes the global economy will deliver the best performance since the global financial crisis in 2018 and is tipping the Australian economy to kick up a gear or two following a period of sluggish growth last year.

Australia will only record growth of 2.1% in 2017 but that will jump to 3% this calendar year, said the broker.

That’s a big call as few are predicting such a bullish outcome. In fact, Morgan’s forecast is well above consensus, which is calling for a rate of around 2.8%.

The pickup in growth will also be felt in the US, where the world’s largest economy is expected to expand by 2.2% in 2017 to 2.5% this year, while the Eurozone will move from 2% to 2.5% over the same periods.

This year could be the “Goldilocks” era for growth where conditions for risk assets is not too hot or cold, but just right.

While growth is accelerating, inflation is expected to remain subdued, and that will take pressure off central banks, particularly ours, to lift rates quickly.

“In Australia, earnings are beginning to recover from a long flat period. That recovery in earnings, together with a very liquid international capital market, should support a stronger outlook for Australian equities,” said Morgans.

The broker estimates that fair value of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is 6,200 points and that the index will reach that target by no later than April this year!

This implies a circa 2% uplift for the big caps over the next three months or so and potentially sets the scene for a pretty positive February reporting season.

As I wrote last week, growth stocks (which are characterised by above market earnings growth and high P/Es) are likely to keep running ahead of value stocks for a while yet. These includes IT stocks like Carsales.Com Ltd (ASX: CAR) and REA Group Limited (ASX: REA); and healthcare stocks like CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH).

You can expect a role reversal later in the cycle when economic growth starts to plateau and move below trend.

But for now, it’s best to focus on growth stocks – like those in the IT sector. In fact, the experts at the Motley Fool are particularly bullish about one group of IT stocks.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited, Cochlear Ltd., and REA 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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