* Stocks positioned to take off, down 4 pct so far this year
* Demand for resources to keep exports, employment high
* Offshore investors fret over inflated house prices
By Miranda Maxwell
MELBOURNE, Oct 18 (Reuters) - Australian shares are about to take off after a mostly disappointing 2010, outperforming other developed markets as the nation thrives on emerging-market demand for commodities and as metal prices reach record highs.
This month, mining stocks such as Fortescue Metals and Rio Tinto finally threw off the shackles of a new tax on miner profits to hit two-year highs, and many believe that this is just the start.
"The profit growth coming out of Australia is likely to be a lot better than the United States over the next three years," said Don Williams, chief investment officer at Platypus Asset Management.
"The fundamentals here are stronger. It's hard to see the earnings of the S&P companies growing faster than Australia in the next three years," he said.
Australia's economy is entering its 20th year without a recession, the price of exports such as gold and copper are surging, workers are enjoying near full employment and the Australian dollar is trading at 28-year highs.
Offshore talk of a housing bubble and dangerous levels of consumer debt has been largely dismissed at home as unplausible.
"The emerging markets will continue to be the area where you'll want to be investing. Of the developed markets, we benefit because of the commodity angle," said Lee Mickelburough, partner at Perennial Growth
"If you look at the Australian economy, it's very well placed on a longer-term basis, given proximity to China, the commodity base, the banking system in pretty good condition, population growth. The stock market itself is attractively valued. The backdrop all looks pretty good."
This year has been described by most as "disappointing."
Australia weathered the global financial crisis with surprising ease but the benchmark S&P/200 index has lost 4 percent so far this year, in contrast to its stellar 31 percent rally in 2009 which was a rebound from a 41 percent fall in 2008.
"It's been a little bit disappointing this year versus in particular the rest of the Asian region," said UBS chief strategist David Cassidy.
"Conditions in Australia are still pretty good but people think Australia got off pretty lightly in respect of the global financial crisis and think that Australia is still potentially at risk in terms of (household) gearing and those sorts of issues."
"We're still pretty positive on Australia. The momentum in the economy and commodities look pretty positive," said Cassidy.
A YEAR TO FORGET
In the year to end-September, Australia's share market underperformed all but two of 15 Asia-Pacific nations, according to MSCI performance indices. Three of Australia's main industries -- resources, energy and financials -- were among this year's worst performers.
"The market was in better shape right through the downturn. Consequently we haven't seemed to keep pace with some of the more depressed economies coming out of that downturn," said Tim Shroeders, portfolio manager at Pengana Capital.
Even so, offshore investors will have made a nice return on Australian stocks on currency repatriation, with the main index up 23 percent in the third quarter when converted to U.S. dollars, compared with 6.5 percent in Australian dollar terms.
Retailers, resource firms, media stocks and possibly telecoms are favoured for 2011, and a recent poll found pundits expect the index to rise around 8 percent to 5,000 by year-end.
Stock valuations are unlikely to hold the market back: local shares fetch 12.66 times forecast earnings over the next 12 months, against multiples of 13.14 in Japan, 13.28 in the United States and 11.91 in Europe, according to Thomson Reuters I/B/E/S.
But the question nagging offshore investors is whether Australia is dangerously laden with consumer debt, over-inflated house prices and banks at risk of mortgage borrowers defaulting.
Some hedge funds are shorting Australian bank shares in anticipation of a crash in home prices, media reports say.
Average house prices in major cities rose 18 percent in the year to June. Cramped terrace houses on city edges, built over a century ago for workers too poor for their own transport, now fetch around A$1 million ($991,000) in some suburbs.
Australian central bankers say that when travelling overseas they are frequently quizzed about Australian house prices. Offshore investors are suspicious that home values could be the economy's Achilles' heel, headed for the kind of downturn and economic aftermath seen in the United States and Britain.
Ratings agency Fitch has received so many enquiries about the sustainability of Australian residential property prices that it has decided to stress-test banks in case mortgage defaults rise and home prices fall substantially. See.
Still, Fitch does not expect a house-price crash crisis and many expect house prices to continue to grow, albeit at a slower pace. BIS Shrapnel said on Tuesday house prices in some Australian cities, including Sydney, would rise 20 percent over three years.
"Sure, it looks relatively expensive on the housing front, but you've got to really hone down and look at the structural drivers of that. Banks have generally been vigilant in their lending. Employment is growing, the population is growing, they're not releasing land and there's no overbuild of houses," said Akshay Chopra, analyst at Karara Capital. ($1=1.016 Australian Dollar)
(Editing by Mark Bendeich and Ed Davies)