This market could heat up as Buffett enters

Warren Buffett, chairman of Berkshire Hathaway Inc.
Lacy O'Toole | CNBC
Warren Buffett, chairman of Berkshire Hathaway Inc.

The stars are finally aligning for Australia's stock market following a recent selldown, as cheap valuations and approval from billionaire Warren Buffet lure traders back in.

The 84-year old investor told Fairfax Media on Tuesday that he intends to spend over $2 billion a year to build stakes in Australian firms after his investment firm Berkshire Hathaway invested $388 million in insurer IAG.

"If you come back in two or three years, you will find we have got four or five Australian equities," he said in a phone interview, adding that the $2 billion cashflow will come from his investment into IAG.

"There is money to be made in Australian equities over the next 10, 20, 30 years ... If we get something we feel comfortable with, we will stick with it for a very long time."

His remarks come as the benchmark S&P ASX 200 begins to recover from a three-month selloff that has left the market unbelievably attractive, according to Goldman Sachs.

"Value looks as good as it has in a decade," said the bank's strategist Matthew Ross in a report this week. He notes Australian equities look 10 percent undervalued relative to other developed markets like the U.S., Europe and Japan.

"At 15.8 times price-to-earnings, Australia also trades at a 9 percent discount to MSCI World - well below its 1 percent average premium and just shy of its largest discount in a decade."

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The S&P ASX 200 index rallied over 1 percent on Wednesday, but has lost more than 4 percent since April. Banks were largely responsible for the selloff, triggered by lackluster earnings reports and a push for stricter capital requirements by financial regulators.

But those cheap valuations won't last for long, according to analysts, especially once the world's most famous investor ramps up investment.

Stocks are set to rise on bargain hunting and improved fundamentals like better earnings, which should see valuations eventually increase, said Evan Lucas, market strategist at IG. "Buffett's investment will undoubtedly be a positive for the market, but it certainly won't be the sole driver."

Australia New Zealand Banking (ANZ) will likely be one of Buffett's top choices, he added. "His investment into IAG was focused on Asia-Pacific exposure, not just Australia. ANZ is best positioned for that seeing as it has operations throughout Asia."

Shane Oliver, AMP Capital's head of investment strategy and chief economist, is also bullish.

"My year-end target for the Australian ASX 200 index remains 6000 .... Continued low interest rates and an eventual improvement in the growth outlook should set the scene for a renewed run up later this year," he said in a note on Friday.

Investors recently received reassurance from the Reserve Bank of Australia that its easing bias remained intact after Governor Stevens left the door open to further stimulus, which should help prop up equities further.