The resources and media sectors have the brightest outlook on the back of Australia's recent company reporting season, according to ING Investment Management (INGIM).
The earnings season highlighted strong growth in future cash earnings, particularly in the resources sector, the fund manager said.
In spite of the mining resources tax, stocks were still positioned for growth, INGIM head of equity research David Langford said.
"While some political uncertainty remains around a possible mining tax, we believe this is factored into current valuations. Accordingly, we consider both large and small-cap miners are well positioned to outperform within the near to medium term," Langford said.
While growth in the Chinese economy eases, investment growth within the country will support the Australian mining sector.
The emergence of the Chinese consumer may also underwrite growth in demand for Australian agricultural commodities and related products and services, Langford said.
INGIM is also optimistic about consumer staples and consumer discretionary stocks because of Australia's robust employment and improving consumer sentiment.
The industrials and banking sectors, however, face market challenges, Langford said.
He said industrial earnings expectations were broadly downgraded for this financial year as were earnings expectations for the next financial year.
Langford remains neutral on banks.
The earnings growth in the banking sector should remain robust, but as the demand for bank credit slows, earnings growth is expected to ease to levels around the mid-teens in the next financial year.
"The Australian banking sector is trading at a price-to-earnings discount to its 10-year average, but in our view, this discount is reasonable and we maintain our neutral stance on banks," Langford said.
He also expected merger and acquisition activity to increase as companies further strengthened their balance sheets.
