“Aussie, Aussie, Aussie!, Oi, Oi, Oi!” is a cheer or chant often performed at Australian sporting events, usually performed by a crowd uniting to support a sports team or athlete. The alternate is for an individual to chant the line “Aussie, Aussie, Aussie!” and the crowd to respond with “Oi, Oi, Oi!”

It’s also a suitable way to express the positive feelings emanating from Down Under in the early part of the Southern Hemisphere spring.

Australia has entered what its citizens and its businesses believe is a period of political tranquility with the election of new Prime Minister Tony Abbott and his Liberal-National Coalition government.

This follows years of Labor Party infighting that saw two separate coup d’état, one where Julia Gillard toppled Kevin Rudd in 2010, one where Mr. Rudd returned the favor in mid-2013 in the run-up to the election that resulted in a change of government.

Consumer sentiment–and spending, based on remarks by Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY) CEO Richard Goyder–spiked, and corporate leaders have spoken highly of Mr. Abbott and his government’s business-friendly initiatives.

Australians’ economic sentiment has rebounded since the federal election, as the Allianz Future Optimism Index more than doubled from July to September.

The index, which is based in a Newspoll survey of 1,200 Australians who are asked to rate statements about the economy from 0 to 10,  hit a 12-month high in February of 12. Political uncertainty made it fall to 5 in May and 6 in July.

Australians’ sentiments about the economy hit a record 13 in September, the highest score since early 2011. The rise in optimism about the future of the economy was particularly apparent among Australians aged 65 and over, who are now more optimistic about the economy than at any time during the last three years. Men and women were both encouraged by the Coalition’s win.

The index also showed that optimism generally rose across the country, with the exception of South Australia, which appeared unmoved by the change of government. The biggest rises in economic optimism occurred in resource-rich Western Australia, which historically has been the most optimistic Australian state.

A Note on the Shutdown

The contrast of Australians’ feelings about government with Americans’ at present couldn’t be starker.

Signs of negotiations between the White House and Congressional Republicans late in the week did trigger a significant rally Down Under on Friday, as the S&P/Australian Securities Exchange 200 Index climbed 1.8 percent at its peak before settling to close up 1.63 percent. The sharemarket gained AUD22.2 billion in value.

The US government shutdown shaves about 0.1 percent off Australian gross domestic product (GDP) every week.

The greater threat is the looming US debt ceiling and the consequences of a default should it not be raised come Oct. 17.

Raising the limit is not about giving the US government more spending power. Rather, it’s about giving the US Treasury Dept the wherewithal to pay off spending commitments already made by Congress.

Failure to raise the debt ceiling, however, would require the US government to essentially slash USD600 billion of its annual spending. That’s 4 percent of GDP, and it’s enough to push the US economy into recession.

If a debt-limit increase isn’t approved, the US government might have to miss interest payments on loans, or fail to pay social security or default on US Treasury securities. The latter are the gold standard as far as bank collateral is concerned, so a large chunk of banks’ assets would also essentially be in default.

It’s hard to estimate the impact on global financial markets of this degree of failure of the US political system.

The US Treasury has concluded that a US debt default will not only affect financial markets globally but also economic growth, jobs and consumer spending, causing a global recession “more severe than any seen since the Great Depression.”

COFER and the Aussie

For the just the second time, the International Monetary Fund Currency Composition of Official Foreign Exchange Reserves (COFER) database report broke down central bank holdings in the Australian and Canadian dollars, which were previously classified under “Other Currencies.”

(In the October 2013 Canadian Edge In Brief we noted that the second quarter report was the first to break out the aussie and the loonie. We regret the error.)

Central banks held USD101 billion worth of Australian dollars as of June 30, 2013, up from USD98.5 million at the end of the first quarter.

They held USD108.8 billion in Canadian dollars, up from USD94.9 billion in the first quarter.

The Australian and Canadian dollars have been in demand since the global financial crisis as relatively safe havens. The aussie in particular was highly desired given its yield, though according to COFER data the loonie is attracting relatively more attention.

At any rate, both the aussie and the loonie continue to pull greater percentages of total reserves.

US dollar reserves held by global central banks were little changed in the second quarter compared to the first. The dollar share of IMF reserves totaled USD3.76 trillion in the second quarter, or about 61.9 percent of total reserves, down slightly from USD3.766 trillion in the first quarter.

Euro reserves rose to USD1.446 trillion, or 23.8 percent of the total, in the second quarter from USD1.431 trillion in the first quarter. Since 2009 the euro’s share of reserve assets has mostly been declining on concerns about the region’s sovereign and economic crisis. At its peak in 2009 the euro’s share of reserves reached just under 28 percent.

The Japanese yen’s share fell to 3.8 percent in the second quarter from 3.9 percent in the prior quarter.

Allocated reserves fell to USD6.07 trillion in the second quarter, or 54.5 percent, from USD6.08 trillion in the previous period.

Unallocated reserves, or those not known and believed mostly held by China, rose to USD5.067 trillion in the second quarter from USD5.007 trillion in the previous period.

US investors who are long Australian equities are also long the Australian dollar. Movements in the aussie versus the US dollar are reflected in prices of the stocks we hold in our portfolios as well as in the dividends we’re paid in respect of those holdings.

For much of the past year that’s been a negative dynamic. From a 12-month high of USD1.0598 established Jan. 10, 2013, the aussie has fallen to USD0.9452 as of Oct.10, 2013, a decline of 5.1 percent.

The Australian dollar has closed as low as USD0.8901 on Aug. 30, 2013, a top-to-bottom slide from Jan. 10 to Aug. 30 of 16 percent.

Since then, however, driven by solidifying Chinese economic data, signs that the Reserve Bank of Australia will hold off on further rate cuts and political uncertainty in the US, the aussie has rallied by 6.2 percent.

That’s a short-term positive for those of us who hold dividend-paying Australian stocks. And the longer-term picture for the Australian dollar, as measured by its growing international profile, is positive as well.

Portfolio Update

Transurban Group’s (ASX: TCL, OTC: TRAUF) traffic and revenue numbers for the first quarter of fiscal 2014, ended Sept. 30, 2013, reflected the strongest quarterly toll revenue growth in percentage terms since the second quarter of fiscal 2011.

Transurban’s portfolio of road assets is among the best in the world. The company has established significant competitive advantages, particularly its relationships with governments in its core markets, that will help it build its networks and grow cash flow and distributions over time.

Portfolio Update has more on Transurban as well as updates on several Conservative and Aggressive Holdings.

In Focus

A little more than a year ago, in the July 2012 In Focus feature for Australian Edge, we identified a group of stocks based on what we called the “Graham Factor,” which is the price-to-earnings ratio (P/E) multiplied by the price-to-book ratio (P/B).

According to Benjamin Graham, known now as Warren Buffett’s mentor but a master investor in his own right during the middle of the 20th century, a P/E ratio at or below 15 and a P/B ratio at or below 1.5 are bright lines for value.

Hence, separating the cheap and the dear based on a “Graham Factor” of 22.5–15 times 1.5–should be a meaningful exercise in identifying candidates for investment at any given time.

As we have long noted, and as Mr. Graham too believed, the most important element of a sound investment decision is a quality underlying business. A key factor we’ve consistently identified as indicative of a quality underlying business is dividend growth.

For this reason we’ve compiled list of 10 stocks from the AE How They Rate coverage universe of 112–including five Portfolio Holdings–with a 22.5 or lower “Graham Factor,” indicating they represent “reasonable value” at current levels, but that also increased their dividends for fiscal 2013 versus fiscal 2012.

In addition to P/E and P/B ratios and 12-month dividend growth, we’ve included stocks with upper-end scores under the AE Safety Rating System.

In Focus identifies 10 stocks–including five Portfolio Holdings–trading at attractive valuations that have also posted solid and recent dividend growth.

Sector Spotlight

On Aug. 15 AE Portfolio Aggressive Holding Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY) announced that a worker at the Christmas Creek mine site had been fatally injured.

Mineral Resource’ Crushing Services International (CSI) unit operates the two iron ore processing facilities at Christmas Creek. CSI delivers 50 million metric tons per annum (Mmtpa) of crushing output to Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUGY) on a build-own-operate basis.

On Sept. 24 Fortescue, the world’s fourth-biggest iron ore producer, announced it would exercise its “step-in” right and immediately assume management and supervision to “ensure the safe and hazard-free operation of the ore-processing facilities” without referring to the recent fatal accident.

Fortescue’s announcement sent Mineral’s share price spiraling from a close north of AUD12 on the Australian Securities Exchange (ASX) as of Sept. 23 to AUD10.89 by Oct. 2.

The temporary move will likely have a small financial impact.

We have more on Mineral Resources in this month’s first Sector Spotlight.

For the 10 years through fiscal 2013 AE Portfolio Conservative Holding Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY) has delivered a compound annual growth rate for net profit after tax (NPAT) of 11.2 percent, and that’s been matched with consistent dividend growth.

And the retail giant is well positioned to benefit as consumers emerge from a spending torpor that gripped Australia during mid-2013.

Having already demonstrated the ability to execute on turnaround as well as expansion strategies and to efficiently and effectively deploy capital, share-price upside for Wesfarmers at this point is likely a matter of macroeconomics.

This month’s second Sector Spotlight focuses on Wesfarmers.

News & Notes

The Australian Economy’s Imminent Rebound: Although this has been a challenging year for Australia’s economy, a number of factors augur well for next year, writes AE Associate Editor Ari Charney.

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

I’m notified almost instantly via e-mail when (or if) you post a comment after you read an article. I can provide nearly real-time answers to your questions, provided the subject matter can be disposed of in such manner.

Thank you for subscribing to Australian Edge. We look forward to hearing feedback about how we can improve the service.

David Dittman
Editor, Australian Edge

Follow @ddittman