Despite a plethora of headwinds, Australia shares may be poised for a rally, as analysts expect more companies to pursue acquisitions.
The headwinds facing the market down under are substantial.
"Iron one is collapsing, the [strong] Australian dollar is killing Aussie profits, a horrendous budget at a time we need expansion and the RBA (Reserve Bank of Australia) is looking at stable policy even as consumer confidence is down," said Hasan Tevfik, an analyst at Credit Suisse, in a phone interview.
It's not what you'd expect to hear from someone who just raised his year-end S&P/ASX 200 target to 6000 from 5600. The index is up 0.8 percent at 5445 midday Thursday.
"There're green shoots and animal spirits," he said. "You can see that with M&A action picking up."
He expects the macro backdrop will stay stable enough to avoid being an impediment, while global bond yields at recession levels are likely to support companies trolling for acquisitions and share buybacks, leading to "de-equitization," or more shares being retired than created.
"Large-cap M&A has picked up substantially, companies are raising capital via the debt market instead of the equity market and 21st Century Fox has delisted," he said in a note Wednesday. "Weak equity supply should be positive for index prices."
He forecasts as much as $2 billion worth of capitalization will de-equitize this year, compared with a net additional around $47 billion new Australian equity added every year since 2006.
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Credit Suisse forecasts around $9 billion worth of share buybacks this year, helped by lower debt costs, while it expects more than $22 billion worth of S&P/ASX 200 acquisitions will be completed this year. It also expects the delisting of 21st Century Fox shrank the index's share count by around $9 billion and the funds will need to be redeployed in the market.
It tips playing the theme via likely M&A targets, such as Myer and Beach Energy, and acquirers likely to make accretive deals, such as carsales.com.au and TPG Telecom, and also companies likely to make earnings-per-share enhancing share buybacks, such as CSL.
"Companies can access the lowest cost of debt in a generation. Those exposed to this easy source of financing should perform well. Those that are not will be left behind," the note said.
Others also expect a pickup in acquisition activity.
"There'll probably be some opportunistic buying in mining," while discretionary and retail have already seen increased activity, noted Chris Weston, chief market strategist at IG in Australia.
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But he doesn't expect a strong rally. "It'll be a slow grind higher," he said, noting resources stocks make up a significant portion of the market.
"They're still very neutral and likely to trade sideways," he said. He expects the newsflow from China, the destination of much of Australia's resource exports, won't remain positive on a sustained basis.
"For investors, there's a lack of clarity to take out big positions for a long period of time," he said.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1