Aussie stocks could rally 10% next year

See 10% upside for Aussie stocks: Macquarie
See 10% upside for Aussie stocks: Macquarie

Australia's stock market, already one of this year's best performers in Asia-Pacific, could rise another 10 percent in 2014 on the back of expectations for upgrades to corporate earnings, strategists say.

The country's benchmark stock index is trading at about 5,320. That's down about 2.5 percent from a five-year peak hit in late October, but still up a respectable 14.7 percent so far this year and way ahead of the MSCI Asia-Pacific index which is up about 9 percent this year.

(Read more: Australia to be 'odd one out' in 2014: Goldman Sachs)

"We've just upgraded our total share-holder return outlook on the Aussie market for the rolling 12 months, so fair value on the index is now 5,894," said Martin Lakos, division director at Macquarie Private Wealth.

"That's up another 10 percent from here and driven largely by upgrades to earnings that's coming up. For investors, certainly we think they should be setting portfolios towards a growth bias," he added.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, has a similar outlook for Australian shares. He forecasts the benchmark index at 5,800 by the end of 2014 – implying a gain of about 9 percent from current levels.

"Next year could be tough since valuations are not as cheap as they were one or two years ago," he said. "But the key point here is that we will continue to head higher as profit growth gets a boost from low interest rates."

Brendon Thorne | Bloomberg | Getty Images

The Reserve Bank of Australia's benchmark interest rate is at a record low of 2.5 percent. Rates have been slashed eight times since late 2011 to boost the economy, especially for the non-mining sectors as mining investment peaks.

Australia has proved to be one of the most resilient economies in the developed world in recent years, underpinned by strong Chinese demand for local resources. But this year the outlook has dimmed, partly as a result of a slowdown in China's economy.

Oliver said that an Australian business spending report released on Thursday paints a positive outlook for the economy and in turn the equity market.

The report from Australia's Bureau of Statistics showed that businesses upgraded their spending plans for the year to June 2014 to A$166.8 billion (US$152 billion), up from a revised A$161.6 billion. Mining investment meanwhile was still expected to dip over the year but by less than previously anticipated.

(Read more: The 21st century is Australia's to take: Murdoch)

"The signs are that Australia will avoid a recession. We have low interest rates and a general improvement in the global economy, which is all helping," said Oliver.

The ASX 200 index was down 0.3 percent on Friday, hurt by a plunge in the shares of GrainCorp after the government blocked a US$2.55 billion takeover bid from U.S.-based Archer Daniels Midland. According to data from Thomson Reuters, the index is on track for its first monthly fall since June.

(Read more: Australia spurns ADM's $2.6 billion GrainCorp takeover)

"I believe the market is likely to bounce back from its small consolidation… due to the support seen in the banks over the last week and the fact BHP Billiton has held above A$37 which had been a long term resistance level over the year," Evan Lucas, market strategist at trading firm IG, said in a note.

He was referring to global miner BHP Billiton, which has a market capitalization of about US$108 billion and is the second biggest constituent of the ASX 200 after Commonwealth Bank of Australia by index weight, according to the Australian stock exchange.

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC