Is the recovery already fully priced into Aussie stocks?

With households packed to the rafters with cash, iron ore sitting at record highs, and Aussies - rightly desperate for a holiday - giving domestic travel a red hot go, it seems investors have a handful of reasons to feel smug.

After all, recent market movements suggest optimism does in fact reign supreme on the ASX. 

This optimism, this joie de vivre if you will, has Auscap co-founder Tim Carleton putting the bears to bed. It's this sentiment that sees him argue that analysts are not yet pricing in the strength of Australia's economic recovery, despite "small pockets of continued stress" within the market.

So, will this positive economic picture paint a bright future for Australia's corporates? You can watch the video or read an edited transcript below to find out. 

NB This video was filmed on Monday 1 February 2021. 

Edited transcript 

James Marlay: Sentiment has swung from dire to quite optimistic in a really short period of time. How much optimism is in the price of the market at the moment?

Tim Carleton: Listen, it's always hard to say. I guess at a headline level, you look at the index today and we are 600 or 700 points from where we were back in February a year ago, and yet the outlook from our perspective looks increasingly favourable for a very, very strong economic recovery. 

So you have an economy which has an extraordinarily accommodative fiscal and monetary policy. The government is running huge deficits, and that has resulted in the fastest recovery in household balance sheets that we've ever seen. If you'd asked me a year ago what the greatest risk to the domestic economy was, I would've told you household leverage. And yet in the last nine months, households and small businesses have saved over $200 billion. I mean, it's extraordinary. 

So you combine that with low-interest rates and an RBA that's also been very accommodative, and it means that household servicing costs are back to where they were in the mid-1990s, which is an extraordinary change from where we were only a few years ago. And you combine that with other things that we're seeing, we've got record commodity prices. I mean, the Aussie dollar iron ore price has never been higher than where it's been of late, and that is very, very favourable for our terms of trade as it is our largest export.

We're seeing a strong recovery in most soft commodity prices in a year in which the drought has broken, so we should see a very, very strong harvest this year. At the same time that we're seeing very strong, soft commodity prices globally. You're seeing household property prices increase, and we expect that that will continue given where interest rates are, which should be positive for domestic consumption. 

We're seeing a domestic tourism boom because people are stuck at home, and what a lot of people don't realise is that Australians spent more abroad than people abroad spent in Australia. So actually the closed border issue is not a problem for the domestic economy.

There are small pockets of continued stress, and obviously, outbound tourism is one, inbound education is another. But as a broad brush picture, the setup to us looks extremely favourable for a very, very strong economic growth recovery and that should translate to significant growth in corporate profit. So, is the market pricing that in? Well, I don't think the analysts are yet pricing in the strength of recovery we might see in earnings that we're forecasting, and if that plays out then equity markets could have a reasonable time.

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