THE Australian sharemarket is expected to lift by up to 17% in 2010, after posting its best gains in 16 years, as the domestic economy continues its recovery from the global financial crisis.
The benchmark S&P/ASX200 index hit a global crisis low of 3121 points during trading in March 2009, but has since trended upward and closed at 4790.9 points ahead of Christmas Day.
CommSec chief economist Craig James says if the sharemarket ends calendar 2009 about that level, it will have gained nearly 30% since January - its best gain in 16 years.
"We believe that the global economy is in healing mode at the moment, but it will take some time to get back to full health," Mr James said.
There are still questions over the shape of the economic recovery in the United States, but in Australia the economy is being driven by China and strong population growth.
"So we're looking for the S&P/ASX200 index to reach 5300 points by mid-year and 5600 by the end of the year," Mr James said of the market's likely performance in 2010.
However, Mr James warned that when investors pile back into a market they can drive up valuations by too much.
"So what we need to see now is some validation coming from (company) earnings," he said.
"The next opportunity to basically see that is February, when we get the next earnings season."
Mr James expects to see a recovery in 2010 in investor appetite for sectors such as real estate and diversified financial stocks - both of which were sold off heavily during the global financial crisis.
Retailing stocks are expected to make more sedate gains, given that base lending interest rates are expected to rise further over 2010.
Investors might switch away from banking and resources stocks, which had underpinned the market's recovery in 2009, to a broader range of stocks.
But Mr James warned there was still potential for "speedbumps", particularly in terms of the financial system and banks, because there were still foreclosures and bad loans to be worked through.
AMP Capital Investors chief economist Shane Oliver also expects the stock market to reach 5600 points by the end of 2010.
"In other words, another reasonable year, but not quite as strong as we've had, because what we've seen in the last few months is a recovery from the panic low," he said.
The current bull market phase will be driven by corporate earnings growth.
The market is also likely to be more volatile, with the Reserve Bank of Australia expected to announce more official interest rate rises, perhaps as soon as February. …