Tony Abbott is fairly in, Kevin Rudd is fairly out.

“Australia is under new management,” said the Prime Minister-elect in his Sept. 7 victory speech, “and Australia is once again open for business.”

There is much hope among Australians–including voters who resoundingly accepted the Abbott-led Liberal-National Coalition’s message as well as Corporate Australia–that formation of a new government under new leadership, leaving out the intramural squabbles that led to two separate coups atop the Labor Party while it controlled power, will get the Land Down Under going again.

As we discuss in this month’s Portfolio Update, the real-world impact of the Liberal-National Coalition’s victory is likely to be muted.

There’s likely to be significant changes to the National Broadband Network under the Coalition, but these concern the manner and the timing by which the vast majority of Australian households will be broadband-enabled.

Cutting to the chase, Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: ANZBY) is very unlikely to be left in a worse financial condition, and it’s possible the owner of Australia’s copper-wire network may end up at least a little better off.

Repeal of Australia’s carbon tax and its mining tax are among the priority items on Mr. Abbott’s agenda. Campaigning on these issues generated a lot of excitement. But the impact of such removal shouldn’t be overstated. In fact few CEOs could directly attribute weaker results of late to either tax.

Getting rid of the carbon tax would please Australia’s corporate giants. But for energy retailers such as Conservative Holding AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) and Aggressive Holding Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY repeal of the carbon tax is ambiguous.

The value of coal-fired power plants–Loy Yang for AGL, the recently acquired Eraring for Origin–will rise. But the value of gas-fired plants and renewable assets may decline.

Repeal of the carbon tax is also unlikely to increase household disposable income much, though every little bit counts and estimates place annual savings on the average utility bill at about AUD200.

Few miners are paying the Mineral Resource Rent Tax due to lower prices and lots of offsets. Coal miners would love to be paying tax because that would mean they were earning profits; lower commodity prices, not taxes, have crunched earnings for most of the industry.

The Coalition will no doubt enjoy a honeymoon. But dreams of straight-higher rally during the three years before Australians go to the polls again are exactly that: dreams.

Confidence is an elusive concept, and Tony Abbott and company may enjoy the benefits of a return to trend growth for Australia. But Australia’s relatively small and open economy means that external factors such as Chinese growth, commodity prices and the value of the Australian dollar will have much more determinative impact on underlying business conditions and the direction of share prices.

There is solid news out there that will support Australian businesses, specifically recent economic data out of China.

China’s annual industrial output rose 10.4 percent in August, while fixed-asset investment, an important driver of economic activity, rose 20.3 percent in the first eight months of the year compared to the same period of 2012. And retail sales were up 13.4 percent.

Chinese power output also climbed for a fourth straight month in August to the second-highest monthly growth this year. Power production and consumption have been rising steadily since May. Electricity output was 498.7 billion kilowatt-hours in August, up 4.02 percent from July and 13.4 percent from the same period a year earlier.

Elsewhere around the world, it appears that the threat of an imminent missile strike on Syria has abated. Oil prices have backed off from recent highs, and global markets are experiencing something of a sigh-of-relief rally.

That’s not to say we have clarity on US policy toward the Middle East, and this could put an even higher floor under global crude price, with positive outcomes (to a degree) for producers but a negative impact on consumer spending.

Indonesia, a key Asian economy, has taken steps to stabilize its currency and counter inflation with an unexpected 25 basis point interest rate hike, which followed a 50 basis point hike in late August. This does, however, pose a threat to growth.

Emerging markets on the whole have bounced back, with Asian currencies surging to a four-week high. S&P Bombay Stock Exchange Sensitive Index, known as the SENSEX, posted a 2.4 percent rally this week, while the Indonesia Stock Exchange Composite Index was up 7.4 percent and the Bankgkok Stock Exchange of Thailand Index was up 4.9 percent.

Middle Eastern markets also rallied, with benchmarks in Turkey (up 6.5 percent), Jordan (up 4.4 percent), Dubai (up 8.6 percent), Saudi Arabia (up 3.4 percent) and Israel (up 2 percent) posting impressive weekly gains.

The Japanese economy may not see a material lift, but it’s a confidence booster for Abenomics that the Land of the Rising Sun has been awarded the 2020 Olympics.

In the US business inventories for July were up 0.4 percent month over month, two times the consensus expectation, and sales were up 0.6 percent.

At the same time, the University of Michigan Consumer Confidence Survey for September fell to 76.8 from 82.1, below the consensus estimate of 82 and the lowest reading since April.

Both Current Conditions and the Economic Outlook were down. One-year inflation expectations rose to 3.2 percent from 3.0 percent, the highest since March even though gasoline prices have yet to follow crude higher.

Retail sales in August were soft at a gain of 0.2 percent, but July’s figure was revised higher. Sales for automobiles, furniture, online retailing and department stores were up. But clothing and building materials were down.

Higher energy and food prices paced a 0.3 percent gain in the headline producer price index, but the core rate was flat, as prices for cars and trucks declined.

Applications to refinance mortgages fell by 20.2 percent year over year to the lowest level since June 2009 and are now down 70 percent since May, when talk of the Fed “taper” started. And applications for new purchases declined by 2.7 percent to a four-week low.

The National Federation for Independent Business Optimism Index slipped a bit to 94.0 from 94.1 against a consensus forecast of 95.0.

The components were mixed. The “plans to hire” quotient was up to 16 percent from 9 percent, the best reading since January 2007. But those that “expect a better economy” fell to negative 10 percent from negative 6 percent, a four-month low.

Those that “expect higher sales” rose to 15 percent from 7 percent. But those that said it’s a “good time to expand” fell two points.

And Europe remains on its difficult path to recovery, as July industrial production in the EU declined 1.5 percent month over month and 2.1 percent year over year.

Recoveries from the type of balance-sheet recession that afflicted the world during 2008-09, as demonstrated by history, are never as smooth as those that follow typical business-cycle downturns. There are lots of ups and downs and conflicting data.

What we can’t afford is to be distracted by office- and power-seekers whose interests do not necessarily align with ours as investors.

Politicians and ruling parties come and go. That’s not to say that elections don’t have consequences. But these are often unforeseen.

Arguments for or against the negative or positive affect of a particular office-holder or party on the economy typically rise from a partisan impulse, rarely, if ever, gauged to enlighten or inform but rather to agitate.

And agitation is not a good state for an investor.

Our focus remains on buying high-quality companies when they’re trading at favorable prices and holding them for the long term.

Portfolio Update

We have earnings from the last group of AE Portfolio Holdings to report for the fiscal 2013 cycle. The numbers, with a couple exceptions, were solid.

As a prelude to the numbers we take a look at key policies of the new Australian government that could or could not impact Portfolio Holdings.

Portfolio Update has what’s happening with our Conservative and Aggressive Holdings in the aftermath of an election and earnings reporting season Down Under.

In Focus

Two years ago, almost exactly two weeks before Australian Edge launched on Sept. 26, 2011, Australia and New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) and economic consultants Port Jackson Partners released a report entitled Earth, Fire, Wind and Water that predicted a resources and commodities boom capable of generating AUD480 billion of exports and creating 750,000 jobs over the ensuing 20 years.

Back then ANZ surmised that the Australian dollar could hit USD1.25 because of sustained commodities prices and higher global infrastructure investment.

And here we now sit, with the aussie at USD0.9272 as of Sept. 12, 2013, down from USD1.0470 the day the ANZ/Port Jackson Partners report dropped and USD0.9833 the day AE debuted and 25.8 percent below USD1.25.

In Focus takes a look at Australia’s resource and energy boom, with a special eye on what’s in store for Portfolio Holdings.

Sector Spotlight

For the foreseeable future, AE Portfolio Aggressive Holding Amalgamated Holdings Ltd (ASX: AHD), the No. 1 cinema operator in Australia and New Zealand, doing business under the Event Cinemas brand, and the market leader in Germany, under the Cinestar brand, is well placed to profit from Hollywood’s current model of building blockbuster franchises.

That’s borne out by a 7.7 percent increase in total dividends paid in respect of fiscal 2013 versus fiscal 2012.

With more than 1,000 movie screens in Australia, New Zealand and Germany Amalgamated is the No. 9 movie exhibitor in the world.

Amalgamated is one of the most technically advanced theater operators in the world, as it’s invested heavily to upgrade its capabilities to include 3D and digital projection. This promises higher-margin receipts at the box office.

We have more on Amalgamated Holdings in this month’s first Sector Spotlight.

AE Portfolio Conservative Holding Ramsay Health Care Ltd (ASX: RHC, OTC: RMSYF), which operates private hospitals in Australia, Indonesia, England and France, has overcome recent changes in domestic health care insurance law, including means-testing for state-provided insurance, by continuing its effective brownfield growth strategy and by growing its profile abroad.

Ramsay reported core net profit after tax (NPAT) of AUD290.9 million for fiscal 2013, a 15.1 percent increase over fiscal 2012. Core earnings per share for the year were AUD1.359, up 17.1 percent from AUD1.161 a year ago and slightly ahead of upgraded guidance management provided in February 2013.

Statutory NPAT was up 9.1 percent to AUD266.4 million.

Management declared a final dividend of AUD0.415 per share, up 20.3 percent over the AUD0.345 final dividend for fiscal 2012. The full-year dividend rate was AUD0.705, up 17.5 percent over the prior corresponding period.

This month’s second Sector Spotlight focuses on Ramsay Health Care.

News & Notes

A Political Honeymoon, Then the Hard Work of Governance: The Liberal-National Coalition’s ascendance should eventually result in the rescission of both the carbon tax and the Minerals Resource Rent Tax, AE Associate Editor Ari Charney writes, actions that should help boost Australia’s resource sector.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced lower dividends during fiscal 2013 earnings reporting season Down Under, which recently concluded. It also includes those that reduced earnings guidance in recent weeks.

The ADR List: Many Australia-based companies that list on the home Australian Securities Exchange (ASX) are also listed on the New York Stock Exchange (NYSE) or over-the-counter markets as “sponsored” or “unsponsored” American Depositary Receipts (ADR).

Here’s a list of those companies, along with an explanation of what these ADRs represent.

How They Rate

How They Rate includes 112 individual companies and four funds organized according to the following sectors/industries:

• Basic Materials
• Consumer Goods
• Consumer Services
• Financials, including A-REITs
• Health Care
• Industrials
• Oil & Gas
• Technology
• Telecommunications
• Utilities
• Funds

We provide updated commentary with every issue, financial data upon release by the company, and dividend dates of interest on a regular basis. The AE Safety Rating is based on financial criteria that impact the ability to sustain and grow dividends, including the amount of cash payable to shareholders relative to funds set aside to grow the business. We also consider the impact of companies’ debt burdens on their ability to fund dividends. And certain sectors and/or industries are more suited to paying dividends over the long term than others; we acknowledge this in the AE Safety Rating System as well. We update buy-under targets as warranted by operational developments and dividend growth.

In Closing

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David Dittman
Editor, Australian Edge

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