By Richard Webb
A RELATIVELY solid economy, historically cheap share prices, corporate profit expectations generally met with profit growth about 15 per cent, commodity prices rising, a strong jobs market without excessive wage growth, inflation under control and a property market that's stalled.
This, in any economic textbook, is a recipe for a sharemarket rally - or at least for shares to head higher. It's why practically every stock expert called local shares substantially higher in 2010. Most predicted a market gain of 12 to 14 per cent. All have been proved wrong.
Barring a Christmas rally to end all Christmas rallies, shares will finish 2010 about 1.5 to 2 per cent down. Many share investors will shrug their shoulders and ask themselves why they didn't just leave their money in a deposit account.
The stock experts are now predicting shares will rally between 12 and 20 per cent in 2011. Here's how they explain what went wrong with their predictions in 2010 and why they believe shares will regroup and charge in the year ahead.
Michael Heffernan, senior client adviser at Austock, says 2010 proved a year of surprises and he believes this derailed expectations.
''We had more factor Xs in the last year then we had in the last decade,'' he says. ''First the Greek debt crisis, then the Icelandic volcano, then on 30 April we got the mining super tax, Rudd became rudderless and got turfed out, we had an election and a hung parliament, then the Irish position deteriorated - at the beginning of the year you wouldn't have anticipated any of it.
''You can't help the volcano but a lot of times we shot ourselves in the foot - we could have done something about the super tax and we might even have nipped the European thing in the bud if we had acted more decisively.''
CommSec equities economist Savanth Sebastian says foreign investors sold a net $40 billion of local shares in the June quarter following news of the proposed mining super tax - the biggest overseas selloff of local equities since the height of the GFC. But he believes it was the Reserve Bank's aggressive lifting of interest rates that took the wind out of the local sharemarket's sails this year.
''It's clearly connected with the rapid-fire rate rises we've had domestically,'' he says. ''This acted as a catalyst for a number of things and we didn't see the push in equity markets we expected. In the US, unemployment may be high, but consumer spending is picking up and their sharemarket has been heading higher.
''The average investor was spoilt for choice locally with term deposits fixed at 6 to 7 per cent - and that's a risk-free rate of return - and the property market didn't crumble here like it did elsewhere too.''
AMP Capital Investors head of investment strategy Shane Oliver says there was a global overlay involved as well, in that the global economy performed better than expected but most sharemarkets didn't rise as much as anticipated.
''It's like investors are still to be convinced even though the global recovery has continued, and I think that's because of the scares through the course of the year such as the Greek debt debacle, worries about a double dip in the US and China tightening too aggressively,'' he says.
Dr Oliver says Australia is perceived to be joined at the hip with China, and says worries about China dragged on our market - Chinese shares are down about 9 per cent for the year. Elsewhere, the rest of the Asian markets are mixed, European stocks are down about 3 per cent, the US is up about 10 per cent and Japan is flat.
''It's been a mixed year and a patchy ride overall,'' he says. ''The strong Australian dollar weighed more on our market than I would have thought, too.''
Still, Dr Oliver believes the ASX200 will hit 5500 by this time next year, for a capital gain of about 15 per cent. ''Shares are cheap at the moment - the forward PE [the price-earnings ratio is a measure of value as it measures the cost of a share against what a company earns in profit per share] has fallen to 12.7 against the long-term average of 14.5 - the US economy is gathering pace, and globally monetary conditions are super-easy. I think that in Australia the benefit of the mining boom will be more obvious too.''
Dr Oliver expects corporate profits to grow a further 12 per cent in the year ahead, so shares will need to rise by this amount to offer the same value - he expects this profit growth will underpin the market.
CommSec's Mr Sebastian also notes that Australian companies are cashed up and ready to expand or buy back shares, both of which will help share prices. ''Corporate Australia is holding $271 billion in cash and deposits - that's over 30 per cent of their total assets in cash, the highest reading in 11 years.'' He expects to see the ASX200 at 5400 by the close of 2011.
Austock's Mr Heffernan, however, goes one further - he believes shares will shoot the lights out in 2011. ''When you look back over the years you can see it's very difficult to predict - the market always seems to surprise you. But all the lights are changing colour from amber to green around the world at the moment and I think we can go 20 to 30 per cent higher without too much trouble - we could be in for a very big rise ahead.''
Why 2011 might actually be better
■Local shares are relatively cheap heading into 2011.
■The corporate profit recovery is continuing - AMP Capital's Shane Oliver expects 12 per cent profit growth in the year ahead.
■The global economic recovery is on track - the US economy is expected to hit a growth rate of more than 3 per cent by the end of next year.
■Corporate Australia has record amounts of cash.
■The mining boom is expected to be more of a benefit to the overall economy in the year ahead.
■The Reserve Bank has done the hard yards with interest rates - although expect three more rises in 2011.
■The Aussie is expected to stay high, with experts tipping it to be between US92¢ and $US1.10.
■Commodity prices should remain strong. Dr Oliver predicts the oil price will break $US100 a barrel.