Note: the comments below in no way reflect my personal views. They are exclusively the views of Investors Mutual, not my own. I'm just posting this as I thought some people might be interested. IML comments on the Australian equity market for the year ended 30 June 2008. The Australian stockmarket suffered its worst year in more than two decades over the year ended 30 June 2008, with heavy falls recorded in the second half of the financial year mainly amongst Industrial stocks. As a result the S&P ASX 300 Accumulation Index finished the year down 13.7% while the Small Ordinaries Accumulation Index finished the year down 20.5%. Our Funds had a disappointing year from a performance point of view as they were impacted by their exposure to Industrial stocks. Industrial stocks had an extremely poor year across the board with the S&P Industrials Accumulation Index returning -26.7% for the year and the Small Industrials Index returning -36.5%, while in stark contrast the ASX 300 Resources returned +28%. This divergence in performance between the Industrials and the Resource sectors over the year ended 30 June 2008 is best demonstrated by the graph attached above. What caused the large falls in the Industrials Index? Industrial stocks had two main issues working against their favour over the year: 1. The credit crisis – this began with the US sub-prime situation in 2007 but evolved in the latter stages of 2007 into a global credit crisis that had a far reaching impact. The credit squeeze has had a huge impact on nearly every Australian household and corporate borrower by tightening the amount of credit available as well as raising the cost of this credit. The situation was not helped here in Australia by the RBA lifting the overnight cash rate by over 1% over the financial year with four separate 0.25% increases. 2. The oil price surge - the June quarter of the financial year witnessed the oil price surge from already high levels of around USD 100 a barrel to a new record of over USD 142 a barrel. The oil price spike has far reaching implications for most businesses, not only in terms of increasing input costs but also impacts on raising inflationary expectations and lowering the potential for economic growth as it reduces the amount of discretionary dollars available to consumers. So given these issues, what is the outlook for Industrial stocks? Clearly these two major issues affecting Industrial stocks remain a concern for investors and confidence in the future earnings outlook remains challenging given the current economic headwinds. Having said this many Industrial stocks are now trading at levels not seen for many years. In terms of our outlook, while in the short term the market is likely to remain volatile, we believe there are some factors that may lead to a sustainable recovery in the second half of the financial year: - In our view the oil price at the levels seen in the June quarter of USD 140 is not sustainable in the medium term. We are already seeing levels of demand slowing with most airlines around the world canceling routes and vehicle traffic volumes flattening in all major economies. In addition, many developing economies are reducing their fuel subsidies, which will also slow demand. Due to these factors we believe a correction in the oil price from current levels will occur in the next six months. - It appears that the RBA will not raise rates again in this cycle despite expected high June CPI numbers. This is in response to statistics showing a marked slow down in Australian economy particularly in areas such as housing construction and retail sales over the last few months. In fact the money markets are now beginning to price in an easing of interest rates in the second half of 2008. Clearly either or both of these events will help support the Industrial sector. Currently many Industrial companies that in our view were trading at expensive multiples twelve months ago are now trading at much more reasonable levels and at PE multiples not seen for many years. We believe many of these companies are well placed to perform over the next few years, and we are looking to selectively add some of these companies to our portfolios. We will report to you on these new additions in coming months.