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The ASX is set to continue its upward trend, with Michael Knox from ABN Amro Morgan predicting a continuous rise in coming months to over 5400 points by early 2007.
Mr Knox explains that phases of the stockmarket move in line with phases of the economy.
“In the first part of this decade the Australian economy was expanding, primarily because of the recovery of Australian housing,” he said.
“The result being that earnings per share growth in the Australian stockmarket accelerated rapidly and at the end of 2005, earnings growth was growing at about 28 percent per annum. A rise in commodity prices also contributed to a stronger market.”
As a result of these increases, particularly the housing boom, the RBA started to put up interest rates. The increase in interest rates succeeded in slowing down the housing cycle.
“That housing cycle in some states, particularly New South Wales and Victoria, turned into a housing bust, that housing bust brought with it a deceleration of earnings growth in the Australian stockmarket.”
“What then happened was fundamentals started to come off. The Australian stockmarket was still rising and continued to rise until the early part of this year, but fundamentals weren’t improving anymore.
A weakness in the fundamentals in the first half of the year led to a stockmarket correction. This dragged the market down more than 10 per cent between April and July this year.
However a reacceleration of earnings occurred in the commodity heavy states of Western Australia and Queensland.
“What that meant was that the fair value of the Australian stockmarket, which we can calculate from the combination of the level of earnings and the level of ten year bond yields, improved sharply. It improved from a fair value of around 4800 points in July, to 5420 points at the end of August to 5440 at the end of September,” Mr Knox said.
“What we’ve seen is a steady improvement, a very rapid improvement, in the level of the Australian stockmarket measured as the ASX200. That measure has leapt 300 points in the last six weeks.”
Now the market is trading at about 5300 points, the question is, is it still going to go higher?
“As best we can estimate, the fair value for the Australian stockmarket right now is 5440 points, so even though the Australian stockmarket is up 300 points in a very short space of time it is still undervalued by around 140 points,” Mr Knox said.
“We think even though the market has been going up, it is still cheap and can continue to rise in coming over months to get to that level above 5400 points sometime in the beginning of calender 2007.”
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Mr Knox explains that phases of the stockmarket move in line with phases of the economy.
“In the first part of this decade the Australian economy was expanding, primarily because of the recovery of Australian housing,” he said.
“The result being that earnings per share growth in the Australian stockmarket accelerated rapidly and at the end of 2005, earnings growth was growing at about 28 percent per annum. A rise in commodity prices also contributed to a stronger market.”
As a result of these increases, particularly the housing boom, the RBA started to put up interest rates. The increase in interest rates succeeded in slowing down the housing cycle.
“That housing cycle in some states, particularly New South Wales and Victoria, turned into a housing bust, that housing bust brought with it a deceleration of earnings growth in the Australian stockmarket.”
“What then happened was fundamentals started to come off. The Australian stockmarket was still rising and continued to rise until the early part of this year, but fundamentals weren’t improving anymore.
A weakness in the fundamentals in the first half of the year led to a stockmarket correction. This dragged the market down more than 10 per cent between April and July this year.
However a reacceleration of earnings occurred in the commodity heavy states of Western Australia and Queensland.
“What that meant was that the fair value of the Australian stockmarket, which we can calculate from the combination of the level of earnings and the level of ten year bond yields, improved sharply. It improved from a fair value of around 4800 points in July, to 5420 points at the end of August to 5440 at the end of September,” Mr Knox said.
“What we’ve seen is a steady improvement, a very rapid improvement, in the level of the Australian stockmarket measured as the ASX200. That measure has leapt 300 points in the last six weeks.”
Now the market is trading at about 5300 points, the question is, is it still going to go higher?
“As best we can estimate, the fair value for the Australian stockmarket right now is 5440 points, so even though the Australian stockmarket is up 300 points in a very short space of time it is still undervalued by around 140 points,” Mr Knox said.
“We think even though the market has been going up, it is still cheap and can continue to rise in coming over months to get to that level above 5400 points sometime in the beginning of calender 2007.”
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