THE Australian stock market, as measured by the S&P/ASX200 index, finished
the financial year at 6275 points - an increase of more than 23 per cent on the previous years figure of 5074 (before counting dividends).

This rate of growth did slow in the last two months of the year with rumblings regarding losses in the US sub-prime mortgage market and rising bond yields being the primary drivers behind the sideways movement of the market in this period. The S&P/ASX200 increased 1.7 per cent over the two months to June 30 2007 versus 10.6 per cent for the last six months. The reason behind any marked movement in interest rates is important when considering stock market investments. We believe the recent increases have been caused by expectations that central banks will continue to lift official interest rates. The reason that central banks are considering doing this is to better match stronger global economic conditions. It is not a reflection of inflation moving out of control, which would have a more serious and enduring negative impact on global asset markets.

Effectively, central banks are shifting economic policy to temper economic growth, but not halt it. An example is the European Central Bank, which we believe will shift from a policy of economic accommodation to one of tempering growth. This will lift the policy rate to 4.5 per cent by year-end. Central banks are not out to spoil the party, but keep inflation appropriately contained. In addition, rising interest rates will restrict valuation multiples expanding (such as P/E's), slow capital growth activity and reduce risk tolerance. Traditional drivers of a bare market stance such as significant overvaluation and sustained high inflation are not apparent. Further support for the Australian market is provided by the continued strength in earnings expectations. The table below provides clear evidence of this, where consensus expectations are for earnings of the overall market to grow by over 11.1 per cent in the 2007 financial year, with further support for similar growth in 2008. The importance of the reporting season cannot be understated as it provides clear evidence of a company's performance versus market expectations and an indication of the company's outlook.

On balance, the economic backdrop remains supportive of equity markets.