Croesus/The Investor's View:August proved to be another torrid month for equity markets with most indices suffering further declines in the context of above-average daily price volatility. However, towards the end of the month there was an appreciable improvement in market sentiment, which has carried through into September.

The underperformance of the Irish market in 2007 is clear from the figures in the table, with the 10.7 per cent year-to- date decline in the Iseq index being well below the falls in the major market indices.

Much of this underperformance is due to the financial stocks, as evidenced by the 17.1 per cent decline in the Iseq financials index. There are, however, some tentative signs that the relative performance of the financial sector is bottoming out.

In August, the Iseq financials index did a little better than the overall market. So far in September, strong interim results from Irish Life & Permanent and a buoyant pre- close trading update from Anglo Irish Bank have injected a degree of confidence into investors' attitudes towards the banks. Indeed, the early days of September have seen the release of a string of healthy results. CRH was first last week, followed by reports from Irish Life & Permanent, Kerry Group, Kingspan, Total Produce and Fyffes.

The results from Irish Life & Permanent and the Anglo trading update provide an antidote to much of the media hype over the summer that has focused on the slowdown in the housing market.

Irish Life is uniquely dependent on the Irish economy with an estimated 92 per cent of its profits attributable to its Irish operations. This compares with AIB, where domestic profits account for only 50 per cent of profits, with the rest coming from the US, the UK and Poland.

In the first half of 2007, Irish Life's operating profit before tax increased by 33 per cent to €321 million, which translated into a rise in earnings per share of 26 per cent and a 12 per cent increase in the dividend per share.

On the banking side of the business, total loans rose by 23 per cent to €37 billion, while the profit margin, as measured by the net interest margin, declined by four basis points to 115 basis points, which is in line with broker forecasts.

The slowdown in the housing market was reflected in a 19 per cent year-on-year decline in gross new mortgage advances. This trend is expected to continue for the second half of 2007 and into 2008.

However, what is often overlooked is that mortgage redemptions also slow down in this environment so that the total mortgage loan book will continue to expand.

Asset quality trends remain strong and there is no sign of any deterioration in the incidence of bad debts. The life side of the business performed extremely well, with pretax profits rising from €134 million in the first half of 2006 to €194 million in 2007.

Overall this was a strong corporate performance and was accompanied by a positive outlook statement from the company's new chief executive, Denis Casey.

Anglo Irish Bank's trading statement released on Wednesday was very upbeat and guided full-year earnings estimates up by 4 per cent. Loan growth at Anglo is continuing at a rapid 30 per cent and the bank remains confident of delivering high-quality growth in 2008 and beyond.

The positive outlook statements from these two financial institutions are particularly significant in the context of the question marks over the sustainability of the Irish economic growth story.

Recently released official data on the labour market add credence to the corporate optimism and lend support to the view that the Irish economy will achieve a soft landing in 2008. The second-quarter labour market data from the Quarterly National Household Survey show that total employment rose by 78,000 from the same quarter in 2006.

On a seasonally adjusted basis, the employment level in the second quarter reached a new record of 2.108 million. It is clear that employment trends in sectors of the economy other than construction remain buoyant.

Positive news from the corporate sector and good news on employment provide some of the building blocks for an autumn rally in Irish equities.

Another potentially positive straw in the wind is evidence that company directors have been buying shares in their own companies in recent months.

On this occasion, Croesus would be inclined to back the company insiders and considers that the Iseq overall index has a good chance of getting back into positive territory by year end.