After a tumultuous 2016, the share market has had a solid start to the new year prolonging the so-called ‘Trump Rally’ which has seen Australian equities rally more than 10.0% from their intraday lows on 9 November when Trump was elected.

With the year now underway and reporting season around the corner, it is pertinent to consider the factors that will influence the share market in the year ahead and provide Wilson Asset Management’s predictions for 2017.

The bull run
First however, it is germane to consider the outlook for the share market in the context of its performance in recent years. In our view, we are now in the later stages of the current bull market. It is almost eight years since the share market plumbed its post-GFC depths in March 2009 marking the start of the bull market.

However, Australia’s bourse is still some way off its pre-GFC high of 6,821 points reached on 1 November 2007. In comparison, in the US the Dow Jones and S&P 500 indices have exceeded, and are now trading considerably above, their pre-GFC highs.

1. Australian economy to improve
Particularly towards the end of 2016, the Australian economy started to show signs of strength and in 2017 we expect continued economic growth, albeit modest. With the rise in commodity prices increasing the taxable income of many mining and mining-related companies, the government is set to receive a fiscal boost this year. Similarly, with the property market remaining strong, many state government coffers will benefit from stamp duty and land tax revenue.

2. Shares to rise
With the Australian and global economy strengthening, our overall view of the market for the next 12 months is bullish. The consensus outlook is similarly upbeat with analysts forecasting the market will rise 8.0% this year. The one factor which we think could lead shares higher this year is the return of company earnings per share growth in select sectors such as resources. In 2017, despite our generally positive view, we anticipate continued volatility in equity markets given the high degree of uncertainty surrounding the implementation of President-elect Trump’s election policies.

3. No more rate cuts
The RBA’s more hawkish stance, together with indications the Australian economy is strengthening, signal an end to the interest rate loosening cycle. While official rates are set to remain at or around record lows in the near-term, we are expecting the next move for interest rates will be up. In our view, the RBA will not raise rates until later this year or early next year.

4. Housing market to remain strong
With Australian house prices (particularly on the east coast) stimulated by record low interest rates for a number of years now, we believe the housing market has reached its peak. Our view is that residential property will normalise in calendar year 2017 away from their above average returns in recent years. Contrary to the doomsayer predictions however, we do not expect the residential property market will crash. We expect the market will remain quite robust over the next 12 months supported by low interest rates and a persistent undersupply of dwellings, particularly stand-alone homes, as supply fails to keep pace with population growth.

The notable exception to our otherwise positive view is the apartment market. We believe caution is warranted in this segment of the market given the considerable supply of apartment dwellings coming online.

5. Resources to outperform, while industrials remain weak
With higher commodity spot prices, particularly coal and iron ore, we expect earnings growth to be strong in the resources sector in 2017. This outlook is contingent Chinese economic growth which in 2016 was driven by government stimulus measures.

In contrast, we expect the share prices of select industrial companies will be weaker in a relative sense, and as such remain a stock pickers market in that sector.

Next week, a further five predictions for 2017.

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