Raising ASX 200 target to an index record 7250
A powerful rally has propelled the ASX 200 to within ~8% of its pre-COVID peak. We expect the index to break through to new record highs for seven reasons:
- Two major vaccine breakthroughs and Australia’s world-leading COVID management, containing the hit to GDP from restrictions to ~3-4%.
- The Reserve Bank’s effective monetary stimulus adding 2-3% to GDP, with its $100 billion quantitative easing (QE) program driving up asset prices.
- The federal and state governments’ unprecedented fiscal stimulus, already reaching ~19.5% of GDP.
- Australia’s strong positioning for the COVID environment, with four positives adding ~4.5% of GDP.
- Evidence of a V-shaped recovery, with 10 of our 12 key leading indicators rising and above pre-COVID levels, implying earnings estimates have substantial upside (Figure 1). Indeed, we see earnings surging 50% YoY.
- A weakening bear case as concerns regarding a third wave, fiscal cliff, major bad debt cycle and protracted U-shaped recovery recede.
- Attractive valuation, particularly adjusted for a V-recovery.
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