As the dust settles on the Greek debt crisis, and thoughts turn to Italy, it is time to take stock of what is really going on in equity markets.

I have no view on the former Greek Prime Minister’s ability to run a country, but I do doubt any other incumbent can swiftly change the will of the people to pay taxes and the culture of the country to accept international standards for retirement ages and wage comparisons between the public and private sectors.

What has happened is that Greece, about the economic size of Philadelphia, has been swept aside by the media while it looks for bigger fish to fry.

Just as the US has not moved forward on pushing the American Jobs Bill through, the putative Bill’s mere existence took the spotlight off the United States. While all of these deliberations have been going on, broker analysts have been quietly updating their forecasts of Australian company earnings over the next 12 months.

Indeed, as can be seen from the chart, my analysis of these forecasts has produced a sharp jump in less than three weeks – up from a low of 9.1% to the current 11.5%.

With around 7% being the long-run average capital gain, this latest forecast is a sign of optimism indeed. Of course, circumstances may change to alter broker perspectives, but these forecasts take into account everything that is currently on the table.

Importantly, this update in expectations takes us back to the value at the end of August, which was around the end of the company-reporting season in Australia. Brokers seemingly had painted in a worst-case scenario for the European situation, and the worst case just didn’t happen!

There is another move starting to take place. Many fund managers have suffered through the last few months and they only have about six weeks to go before they calculate their performance statistics for the quarter and the year. Such situations often lead to rallies that sometimes fade after the end of the year. To me, it looks like you should either be in the market now (like me), or wait to see what January has to offer if the rally does get its second wind.

Other statistics I calculate include mispricing – or irrational exuberance – of the market. Currently, I have the market underpriced by about 4%, up from the 20% underpricing at the start of October. This 4% can be added to the expected capital gain of the market for the next 12 months to give a return of over 15%.

With the materials sector being 9% underpriced by my reckoning, and a 15% capital gains forecast for the next 12 months, it’s hard to go past BHP Billiton (BHP) and Rio Tinto (RIO). They may be big and boring compared to small cap gems, but superannuants need to take risk into account even more than other investors.

And what of the interest rate cut I wrote about last time? We got it because half of the economy is suffering and unemployment is one to watch. Unemployment has remained relatively well contained at 5.2%, but there is the potential for this to change. The peak unemployment rate during the GFC was 5.9% and, if we creep up in that direction, more cuts will follow.

With no RBA meeting in January, and December being a bit too close for another cut, a lot could happen in the labour market over the next two to three months to cause a big cut in February. I think the fact that rates were cut at all will be a massive boost to consumer and business confidence because that puts rate rises off the table for a while. People can now budget with a little more certainty. However, it will take some time for stronger hiring to commence and work its way through to reducing unemployment.

Interested readers can now keep up with our forecasts, exuberance statistics and other measures on www.woodhall.com.au, which we update weekly.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in the Switzer Super Report

• Peter Switzer: My stock market strategy for SMSFs
• Charlie Aitken: Energy stocks that will outperform
• Tony Negline: Four reasons to put commercial property in super