After a relatively uninspiring seven per cent gain in 2017, Australian shares are expected to lift roughly 8.5 per cent in 2018, with improved economic circumstances and earnings tipped to give local shares a boost.
As US stocks surge to new records and global growth outlook improves, investors can expect Australia to lag behind offshore markets but still make ground, with improvements expected from the industrials sector in the coming months.
The year will include challenges including a banking royal commission, the US half-term election and renewed Brexit instability after a year of negotiations.
And while the Australian dollar is currently benefiting from weakness in its US counterpart, analysts say the local currency is likely to drift lower, although how low remains an open question.
Foreign markets should advance as the global economy continues to strengthen and bond yields continue to rise.
The International Monetary Fund tips global economic growth to lift from 3.6 per cent in 2017 to 3.7 per cent in 2018.
Investors will closely watch the path of the US economy in light of recent tax cuts as well as the intention of US President Donald Trump’s administration to pursue increased spending on infrastructure.
The benchmark S&P/ASX200 stock index finally hit the 6,000 point mark in 2017 and, with stocks looking to stay above that level so far in 2018, Australian shares could be in for another solid year.
AMP Capital chief economist Shane Oliver says gains from economic and earnings data is set to push the main index to 6,300 points.
Head of investment strategy at Perpetual, Matt Sherwood, says growth will be best in the industrials sector, while resources will be a wildcard due to unpredictable commodity prices.
There will, however, be a few ‘derailers’ in the months ahead, according to CMC Markets chief strategist Michael McCarthy, who expects all eyes will be focused on inflation data and how the RBA responds to a better economic outlook.
Global political events, including ongoing Brexit negotiations, the US half-term election in November and promised US legislative changes will also play their part.
‘We are likely to see investors switch mentality a number of times over the year,’ Mr McCarthy said.
Resources were the engineroom of equities last year and with the price of commodities such as iron ore and oil edging higher the outlook for the sector looks positive for 2018.
Oil is currently signalling a strong move, partially thanks to a weaker US dollar, and is likely to have a positive reaction on shares for some time, as investors take a liking to optimism in the industrial outlook.
But Mr McCarthy expects the higher prices could eventually drag on earnings, particularly for companies exposed to oil prices.
Gains in iron ore, which has remained positive following a major peak of $US90 a tonne in August, look sustainable, according to Mr McCarthy. The price is currently in the mid-$US70 range.
The upcoming royal commission is the biggest concern for the banks.
Fitch Ratings says the banks’ reputation has already been bruised by the inquiry debate and further damage could lead to greater pressure on profitability, with the possibility that foreign lenders will increase debt charges.
The royal commission will have 12 months to complete its inquiries with a final report expected to be delivered by February 1, 2019.
The ratings agency also expects profitability for the banks to slow in 2018, as a result of the low-interest-rate environment, slow asset growth, competition for assets and deposits, higher funding costs, increased loan-impairment charges and technology investments.
The Australian dollar reached a peak of 81 US cents in September before drifting back, then finishing 2017 at 78 US cents – driven by a jump in the last few weeks in key commodity prices.
The improvement in commodities and the weakened US dollar are currently driving a rise in the local dollar but Oxford Economics says the Aussie will drift down towards 75 US cents in 2018, due to slower demand for commodities and shifting market sentiment.
Westpac senior currency strategist Sean Callow expects the dollar to sink to 70 US cents by the end of the year, saying the US Federal Reserve is likely to deliver a series of rate hikes that make the greenback more attractive.