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Australia's post-election cheer may prove short-lived

Monday, 16 Sep 2013 | 9:27 PM ET
Brendon Thorne | Bloomberg | Getty Images

Market euphoria has driven Australian shares to fresh multi-year highs but some analysts are warning that the factors that weighed on equities earlier this year haven't really gone away.

Post-election cheer has seen Australian stocks rally over 2 percent since the federal elections were called on September 9, while the Australian dollar has risen around 1 percent.

News that Larry Summers dropped his bid to succeed Ben Bernanke as Fed Chairman added fuel to the fire, sending Australian shares to their highest level on Monday since May 2008.

(Read more: Australia's election is over, now what for the economy?)

But some analysts warn that the recent positivity could be premature.

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Kelvin Tay, Regional CIO, Southern APAC at UBS Wealth Management says Australia's luck is about to run out, as China's demand for commodities will soon flatten out.

"Yes Australia's currency and its stock market have had a good time... [but] there isn't a strong macro story for Australia at this juncture," said Vasu Menon, vice president of wealth management at OCBC bank.

Sentiment surrounding the Australian economy has turned markedly bearish this year amid speculation of a peak in the country's mining sector, slowing demand from major trading partner China and ongoing political uncertainty.

However, more positive economic data out of China in recent weeks coupled with the euphoria of a new Liberal National coalition government have started to fuel hopes that the economy could be getting back on track, leading to gains for the domestic stock market.

(Read more: Here's how you can trade Australia's elections)

But OCBC's Menon, who remains unconvinced about the stabilization of China's economy, thinks Australia is on course for more pain.

"Despite the recent [positive] data [out of China] you have to put into perspective the economic picture in China. It's slowed down significantly from two to three years [ago]," he said.

"The new government appears intent on ensuring greater social equality, that corruption is weeded out, and that the banking system is strengthened. I think that means slowing growth for China in the coming quarters and a slower China might not be the best piece of news for Australia," he added.

(Read more: Dreaded R Word Catching Up With Australia)

Other analysts were also concerned that investors might be underestimating the extent of China's slowdown.

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Rob Aspin, head of equity investment strategy at Standard Chartered advised investors to trim their positions in the Aussie dollar as a result.

"China will be marginally weaker than the market expects and that will obviously impact the Aussie dollar," he said.

However, Alistair Chan, economist at Moody's Analytics, said he believed China's economy to be recovering. He expects China's gross domestic product growth to exceed the government's 7.5 percent target this year.

"Regarding China I think the business cycle is turning up. The commodity cycle, as defined by both import volumes and prices, also appears to have troughed. Whether this leads to higher profits for Australian companies and hence higher stock prices is hard to tell," he said.

(Read more: Australia has squandered resources boom: John Hewson)

But Chan said it was important to note that Australia's economy and stock market were not completely reliant on growth in China alone.

"The biggest drivers of the [Australian] stock market are domestic factors, such as monetary and fiscal policy," he said.

Australian stocks traded around 0.1 percent higher in Asia trading on Tuesday.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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