Deutsche’s 13 predictions for our share market this year

Expect a spike in market activity as investors return from their summer holidays and gear up for the start of the profit reporting season, which will likely set the tone for our market for the rest of the year.

You’d better strap in.

While all signs are pointing to positive earnings results on the whole for our market, things can turn quickly.

To help you get a sense of what might lie ahead, Deutsche Bank has provided answers to 13 pressing questions that are on the minds of most investors as they look for clues on how the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) will perform this year.

Can the market deliver another year of good earnings growth?

Deutsche thinks so and noted that earnings forecasts have held up very well so far in FY18 with consensus forecasting 7% growth. The broker’s Profit Pulse reading is strong, providing further evidence that solid growth, mostly thanks to resources, should continue.

Can above-average equity valuations be sustained?

Deutsche’s model has been correct in calling for a 16x multiple in recent years, and continues to say that’s fair value. The cyclically-adjusted price-earnings (P/E) ratio has now risen above average, but low bond yields suggest equities are still cheap.

Will global growth remain strong?

Prospects are good with positive data surprises, strong PMIs and upgrades to company earnings, notes the broker. US corporates are investing, and Europe is firing.

Can Chinese growth continue to support commodity prices?

Nominal growth is strong, the trade cycle is robust, and the corporate sector is buoyant. Deutsche added that housing looks to be bottoming out, while steel consumption per person isn’t that high compared to other countries. This is good news for our mining majors like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

Can resources outperform the market again in 2018?

The short answer from the broker is “yes”! Commodity demand/supply fundamentals look good, earnings are being upgraded, and free cash flows are very high. On the energy side, share prices are still catching up to the oil price, and the LNG outlook has improved. This explains why stocks like Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO) have been performing well over the past 12 months.

Is a better year in prospect for the Australian economy?

The broker said real GDP growth should rise, although that’s ‘empty-calorie’ growth. Nominal growth is more likely to fall, and households’ contribution to growth has dropped. Those factors matter more for equities.

Can wages growth rise and sustain the recent pickup in consumption?

Deutsche still like consumer exposure tactically, but have concerns as the year progresses. More labour market tightening is needed to get wages to grow and other countries still aren’t there yet even though their cycle is more advanced.

Can stocks get a tailwind from a lower AUD?

The broker thinks it will but only a little bit. Even with a solid global backdrop, a weaker domestic story argues for some AUD downside later in the year. It likes offshore-exposed stocks, but primarily for the better earnings growth on offer.

Is the underperformance of banks coming to an end?

There is some good news here as the broker thinks so. It notes valuations are cheap, yields are attractive and bad debts should stay low. But it’s hard to get excited about upside currently given slowing credit growth and the persistence of regulatory risk. Deutsche is neutral on this sector, which includes Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).

Will the value trade revive in 2018?

Top-down indicators say ‘yes’, according to the broker who notes the wide valuation spreads and very expensive growth stocks. But given challenges at the micro level, it is only leaning mildly to Value.

Is it time to call last drinks for the yield trade?

Income investors should pay attention to Deutsche’s answer as the broker thinks “yes”, particularly for infrastructure and utilities, which could drop more after running hard vs. bonds. Good growth and rising inflation should see investors look elsewhere.

What sectors are least/most loved?

The broker puts banks, utilities, media and telcos in the “unloved” section; with contractors, commercial services, and food and beverage as the most loved.

Will Australia underperform again in 2018?

The broker thinks probably yes. Most other countries have better FY18 earnings per share growth, and Australian valuations are okay rather than cheap. The large banks weighting doesn’t help either.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, National Australia Bank Limited, Rio Tinto Ltd., and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank 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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