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ASX's bear market likely to be Gummy, not Grizzly: Credit Suisse

Leslie Shaffer | CNBC

Australia's shares are set to enter a bear market, but there's a two in three chance investors who buy in will emerge with a profit if they hang on for a year, Credit Suisse said.

So far, Australian stocks have avoided bear territory, but just by the skin of their teeth; at Friday's close, the S&P ASX 200 was down around 18 percent from its 52-week high of 5,982.69, set in April 2015, despite posting a 1.07 percent rally for the day.

Credit Suisse expects that could change at any time.

But if it does, it's likely to be a Gummy bear that grips equities, not a Grizzly, the bank said in a note on Thursday, after examining the past 12 bear markets Down Under. That's a nod to a popular sticky, bear-shaped candy.

In a Grizzly bear market, the index falls by a further 20 percent, while under the Gummy scenario, the benchmark would rally by an average 24 percent over the next 12 months, Credit Suisse said.

Residential property along the harbourfront in Sydney.
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"Grizzly bears are associated with deeper profits recessions and higher starting valuations. Our forecast of flat EPS (earnings per share) and reasonable starting valuations (as measured by cyclically adjusted price-to-earnings ratios) suggests the potential upcoming bear market in Australia will be of the Gummy kind," Credit Suisse said.

"Australian companies will continue to do enough to help sustain current levels of profitability, even without a strong growth backdrop," it said, noting many companies are cutting costs and demerging assets.

Additionally, "commodity companies have already endured a 70 percent EPS decline. Now commodity companies account for only 10-15 percent of Australian market profit. Their ability to weigh on total corporate earnings is much diminished."

Australian share valuations are also "reasonable," it said.

"At current prices investors are already pricing in an 18 percent EPS decline," it said. "The cyclically adjusted price-to-earnings ratio for the ASX 200 is close to the lowest level in 35 years." Shares in Australia are, at worst, at fair value, it said.

"The pull-back provides another opportunity for Aussie investors to buy cash generative and growing companies at a reasonable price," Credit Suisse said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1