While weak Australian consumer confidence, higher taxes and tighter banking regulations would continue to affect sentiment towards domestic retailers and banks, managers said they believed the S&P/ASX 200 Index could rally as much as 15 per cent as valuations remained attractive and sectors with stronger fundamentals outperformed.
"Our view is that we think the market's potentially undervalued by about 10-15 per cent," Bennelong Australian Equity Partners chief executive Paul Cuddy said.
"We think last year what pressured share prices was lower confidence, higher interest rates, an appreciating dollar and a fair few concerns about the sustainability of the recovery in the global economy, particularly out of China and the United States.
"So I think towards the back end of the year a lot of those headwinds dissipated and I think going into 2011 we're quite encouraged by the outlook for more productivity gains for corporates and probably a more stable interest rate outlook as well as a more stable currency outlook."
Cuddy said miners and mining services would be among the standout themes in 2011, while tougher conditions were anticipated for the consumer, housing and transport sectors.
"Capital management and merger and acquisition activity will be a key theme in 2011. As business confidence improves, companies will be actively assessing the best ways to deploy capital accumulated over the post-global financial crisis period," he said.
Fidelity Investments head of Australian equities Paul Taylor said he was positive on the prospects for the market in 2011.
"The long-term positive fundamentals of the Australian market remain in place and valuation levels are currently very attractive," Taylor said.
One of the stocks that managers including Fidelity, BT Investment Management and SG Hiscock & Company (SGH) believed would outperform was diversified miner Rio Tinto Group.
"Resource companies will benefit from the growth coming from emerging markets and continued strong commodity prices. Rio Tinto remains one of the standouts in the sector from both a growth and valuation perspective," Taylor said.
SGH portfolio manager Robert Hook said he agreed Rio Tinto was very attractive, even more so than larger rival BHP Billiton.
"We prefer Rio Tinto over BHP at the moment as we think the strength in the iron ore prices will continue and this is the major source of their income," Hook said.
However, Hook and Greencape Capital portfolio manager David Pace also pointed to opportunities in other areas.
Pace said he liked global packaging company Amcor and toll roads operator Transurban.
He said Transurban paid a yield of around 4.5-5 per cent and had strong earnings growth potential.
Hook said he expected Woolworths and Wesfarmers to perform reasonably well and also favoured CSL and Ramsay Healthcare.