Big Wall Street broker Morgan Stanley has shifted its bearish stance on the Australian market from full-on grizzly bear to a more benign panda bear on the back of a better near-term outlook in China.
Morgan Stanley has revised up its 12-month target for the benchmark ASX 200 index from 4,800 points to 5,200.
While that is an undoubted thawing of sentiment, it still forecasts a 4 per cent slide from current levels.
"It is clear some of the planks to our bearish stance have softened," equity strategists Chris Nichol and Daniel Blake wrote in a note to clients.
"Growth impacts from Brexit are less immediate, and now our house call is for a more constructive China outlook.
"Our lift in base case target (5,200 points) is an acknowledgement that while macro risks are kicked down the road, the multiple investors pay for earnings remains higher than historical norms."
The broker's earlier warnings about falling domestic earnings have been borne out, but an upturn in the fortunes of the resources sector and new mini-stimulus cycle in China has caused the rethink.
"While this week's IMF global growth downgrade highlights a still-subdued environment, our Global Economics team notes that incoming data is actually less weak than our forecasts updated mid-July after the UK referendum vote," the note said.
The key ingredient to the shift in sentiment on China is that growth is now tracking above earlier expectations - supported by a new wave of government stimulus and a robust housing market - as well as better conditions on the supply side with massive inventories being cleared.
Investors warned market is still expensive
However, the research is hardly a clarion call to investors to plunge back into the market with their ears pinned back.
The ASX 200 has risen 7 per cent since the initial fallout from the Brexit vote in June and is almost 15 per cent above the lows of February.
Of particular concern to the Morgan Stanley team is, at current levels, the ASX 200 price-to-earnings multiple of more than 16 times is straining at historical highs - and the "real world" of industrial stocks (minus financials) is at an even richer 20 times earnings.
"We continue to caution investors from chasing the market rally given domestic growth risk, as the muddle-through Australian economy and housing boom face fatigue," they warned.
"Indeed with an RBA on hold for the near term and some cracks showing in housing-linked activity levels, we find it difficult to call for meaningful ASX 200 upside while industrial earnings remain soft.
"This reflects our still underweight banks positioning and underpins our caution around the consumer and housing-linked sectors."
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