Craigs Investment Partners broker Chris Timms is expecting a much improved performance in the ASX200 in 2012 after a year of persistent earnings downgrades across the Tasman.
He expects the ASX200 to reach 4700 points by the end of the year, up 15% on the current mark.
"Our forecast acknowledges the downgrade risk to mining, given commodity price falls, and also envisages further downgrades for industrials."
That would still leave moderate earnings growth. As risk sentiment gradually improved, the market could move higher, he said.
In a historical context, the market performance in Australia over the past few years had been underwhelming. When indexed to the market peak before the largest falls in history, the current level was the lowest of all recoveries.
When the trough was indexed, the picture was similar. The current recovery had bettered only the late 1980s episode, he said. The late 1980s and early 1990s episodes started with very high valuations and then rolled into Australia's most severe recession of the post-war era.
Foreign investors and superannuation funds continued to funnel new money into Australian shares.
The recent Australian Bureau of Statistics financial accounts for the September year showed ongoing solid equity market inflows, he said. In the period, superannuation funds injected $A38 billion ($NZ50 billion) in to the Australian, or 3% of the market capitalisation.
"Interestingly, foreign investors have also injected a solid amount of funds into the local market, despite talk of concerns over the high Australian dollar and sovereign risk.
Meanwhile, households continue to be net sellers of equities."
The increase in foreign inflows into Australia was consistent with United States Treasury data. US investors had made net purchases in the past year but there was a pull-back in September. That might reflect US investors fleeing to the safety of their home market after the correction in August. .
The degree of buying by foreign investors did seem to conflict with the ongoing concern many in that group continued to have about Australian banks. But ABS data confirmed it, showing that more foreign investors had been net sellers of banks for the past two years.
"This has been more than offset by foreign investors buying of other sectors of the market, presumably weighted towards resources," he said.
Mandatory contributions for superannuation funds had continued to rise in line with rising incomes, averaging $A14 billion a quarter. In contrast, discretionary contributions had been modest, due to weaker investor sentiment amid rising concerns about global growth.
Superannuation funds continued to be conservative in their investment decisions.
They still held a "relatively high" proportion of their assets as cash and deposits, Mr Timms said.
"Between solid additions to cash holdings, and cash outperforming equities, cash holdings are now at record highs.
This should provide some firepower for equities at some point, once super funds have more confidence in the outlook for global growth and market conditions."
Superannuation funds had given a heavy weighting to Australian domestic shares. Domestic fixed income securities were not a huge market given relatively low Government debt and a small market for corporate debt.
Superannuation funds had not invested heavily in foreign securities in recent months, despite the strong Australian dollar, Mr Timms said.
"This could turn around at some point, but given ongoing mandatory contributions and high cash holdings, we see ongoing scope for super funds to buy domestic shares."
Australian households continued to opt for the safety of deposits over buying shares, he said. As a result, households' exposure to cash and deposits were around levels seen during the early 1990s recession and their exposure to shares was at a record low.
It could be that the events of the past few years would continue to affect households for a while longer. Althoughhouseholds continued to get exposure through superannuation funds, strong buying of shares outside of those funds might take several years, as happened following the 1987 crash, Mr Timms said.
