Australian markets are set to recover in the New Year, according to UBS, against the backdrop of the mining boom's end.
With mining capex growth projected to slow through 2013, and global risk easing, UBS has said in its Australia Economic Perspectives report that the domestic economy will correct itself.
"A modestly improving global backdrop should see Australian growth recover to trend over the coming year," the report said.
"We see a continuation of growth of about 3 to 3.25 per cent over the next couple of years, but with the composition less driven by mining capex, and rotating back somewhat toward more domestic-cyclical led growth."
"In other words, we expect the long talked about 'rebalancing' of the economy to unfold over the next couple of years."
While domestic growth will not significantly improve, the economy is predicted to deliver "different" growth, beyond the two-speed economy seen in 2012.
With the Reserve Bank of Australia putting interest rates on hold at 3 per cent, the market will also see yields rise in line with global trends, but they will continue out-performing.
"We see [Australian 10-year bonds] as expensive relative to our fair value models," the UBS report said. "While rising offshore yields should see Aussie 10-year yields move higher over time, ongoing offshore demand and a lesser required future normalisation of rates, increases the potential for out-performance."
UBS predicts Australian 10-year yield bonds will target 3.8 per cent and 3-year yields will rise to 3.4 per cent by the end of 2013.
