The Australian dollar closed 2012 at USD1.0394, just above its average for the year of USD1.0357.

The aussie hit a closing peak of USD1.0598 on Jan. 10, 2013, and closed at USD1.0545 as late as April 10.

There was then still a significant differential between the Reserve Bank of Australia’s (RBA) benchmark overnight cash rate, which was 3 percent but had already been cut from its post-Great Financial Crisis high of 4.75 percent, and the US Federal Reserve’s fed funds rate of 0.25 percent.

The breadth and depth of the resource-spending contraction Down Under was yet to be revealed, however, and the RBA’s Index of Commodity Prices was just beginning to roll over.

Global central banks were accumulating Australian dollar-denominated assets in increasing amounts, building a long-term floor under the currency.

But RBA Governor Glenn Stevens, recognizing the burden a stronger aussie imposed on non-resource export sectors of the domestic economy, including manufacturing and tourism, has been talking down the aussie for months.

Fed Chairman Ben Bernanke’s signal in the spring that the US central bank was considering, finally, the end of its USD85 billion per month bond-buying program–affectionately/derisively referred to as “QE3,” as it was the third iteration of quantitative easing undertaken to keep interest rates low–affectively kicked the stilts from under the aussie and it’s been a fast ride down.

For the year, as of the close of trading on Dec. 13, 2013, the Australian dollar is down 13.7 percent to USD0.8964. From its 2013 peak the decline is 15.4 percent. From its all-time high closing high of USD1.0993 on July 29, 2011, the aussie has now declined 18.4 percent.

That’s had a profound impact on US investors who own dividend-paying Australian equities. Not only are capital gains eroded by the depreciation of the aussie. So too is the value of dividends paid in the currency.

Take, for example, Ramsay Health Care Ltd (ASX: RHC, OTC: RMSYF), the top-performing Portfolio Holding thus far in 2013. In local terms Ramsay has seen a price-only gain of 50 percent and a total return, which includes dividends on top of capital gain or loss, of 53.1 percent.

Accounting for the decline in the Australian dollar, Ramsay’s price-only gain for US investors is 29.4 percent, the total return 32.1 percent. That’s a difference of more than 20 percent.

Our biggest loser, Aggressive Holding Ausdrill Ltd (ASX: ASL, OTC: AUSDF) looks ugly in any currency, with a loss of 66.9 percent in aussie terms, 71.5 percent in greenback terms.

A more moderate example is Conservative Holding APA Group (ASX: APA, OTC: APAJF), which has posted a total return in Australian dollar terms of 14.8 percent but an overall loss of 0.9 percent in US dollar terms.

But that’s the reality of investing overseas. You suffer the downside of foreign currency depreciation versus the buck as much as you enjoy the upside of appreciation.

It illustrates too the importance of diversification. If you earn your income in US dollars you want to allocate most of your investment capital in the US, with reasonable exposure to dividend-paying equities in foreign markets such as Australia and Canada as well as Europe and Japan.

The bottom line is that the AE Portfolio Conservative Holdings generated an average US dollar total return of 1 percent from Dec. 31, 2012, through Dec. 13, 2013. The Aggressive Holdings, meanwhile, including new addition Sydney Airport (ASX: SYD, OTC: SYDDF), posted a loss including dividends of 16 percent.

For purposes of comparison, iShares MSCI Australia Index Fund (NYSE: EWA), a decent benchmark for the Conservative Holdings, posted a negative total return of 3.1 percent for the relevant time period.

IQ Australia Small Cap ETF (NYSE: KROO), a reasonable analog for the Aggressive Holdings, is down 18.1 percent year to date.

The broad-based S&P/ASX 200 Index, meanwhile, is up 14.3 percent in local terms, including dividends, thus far in 2013 but down 1.41 percent in US dollar terms.

As AE Associate Editor Ari Charney reports in this month’s News & Notes column, the Australian economy is still struggling, evidenced by the fact that the Australian Bureau of Statistics’ report for November showed a greater-than-expected number of new net jobs were created but that the unemployment rate ticked up to 5.8 percent from 5.7 percent, matching the highest level since August 2009.

At the same time, China’s November exports rose 12.7 percent year over year, well above the estimate of 7 percent, though import growth was a bit below expectations. Inflation in the Middle Kingdom is also tame.

And Chinese manufacturing beat analyst estimates in November.

The Purchasing Managers’ Index (PMI) for November was 51.4, according to the National Bureau of Statistics and China Federation of Logistics and Purchasing, exceeding 24 out of 26 estimates in a Bloomberg News survey. A separate gauge from HSBC Holdings Plc and Markit Economics was 50.8, topping all 13 analysts’ projections. PMI Numbers above 50 signal expansion.

That China’s economic recovery is maintaining momentum is good news for Australia heading into 2014.

Meanwhile, it’s fairly clear at this point that the Fed wants to exit the bond-buying business without driving long-term interest rates higher in an environment of still-shaky economic growth in the US. That’s a big variable for short-term share-price movements all over the world.

Ultimately, however, the eventual start of the taper will mean that employment trends are at a level indicating sustainable economic growth. And that’s a net positive.

The Fed’s “beige book” already indicates solid labor trends based on information provided by businesses in the various Federal Reserve districts, with higher wages in the offing for an economy that’s built on consumer spending.

There are also positive signs that the balance-sheet repair at the consumer level so necessary for sustainable growth has largely been achieved.

And the US Congress is halfway down the path of removing the potential for another government shutdown from the threats list for 2014, tough there’s still the open question of yet another debt-ceiling brawl in early February.

But easing some of the spending cuts mandated by the “sequester,” if not getting to neutral from a fiscal perspective, will boost US gross domestic product in 2014.

It has indeed been a tough 2013 for US investors who already own Australian stocks. But those of you who are just establishing positions are doing so at value-based levels.

And the long-term prognosis on all counts is positive.

Portfolio Update

Australian Treasurer Joe Hockey rejected US-based agribusiness giant Archer Daniels Midland Co’s (NYSE: ADM) acquisition of Aggressive Holding GrainCorp Ltd (ASX: GNC, OTC: GRCLF), which was one of our “Eight Income Wonders from Down Under” that populated the AE Portfolio in our Sept. 26, 2011, debut issue.

The decision wiped out a significant takeover premium built into GrainCorp’s share price since ADM’s first offer for Australia’s biggest grain handler in October 2012.

The takeover premium is gone. Left behind is a solid business with a dominant position on the east coast of Australia, well located to serve grain-hungry markets in not just China but greater Asia and the Middle East too.

Meanwhile, Aggressive Holding WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) has announced another downward revision to earnings guidance.

In October, at its annual general meeting, management forecast that fiscal 2014 underlying net profit after tax (NPAT) would “increase” compared to fiscal 2013’s AUD322 million.

In late November, however, WorleyParsons announced that, due primarily to projects deferrals and delays for its key Hydrocarbons unit as well as rising costs at its WorleyCord fabrication and construction business, fiscal 2014 underlying NPAT would be between AUD260 million and AUD300 million.

Because WorleyParsons’ policy is to pay out 60 percent to 70 percent of NPAT in dividends and to invest the remainder in growing the business, it appears that the fiscal 2014 dividend will come in below fiscal 2013’s level.

Portfolio Update has more on GrainCorp and WorleyParsons, and we also highlight positive earnings guidance from several Holdings.

In Focus

From Dec. 31, 2012, through Dec. 10, 2013, the S&P/Australian Securities Exchange 200 Index posted a price-only gain of 10.6 percent in local currency terms. Including dividends paid pushed the main benchmark Down Under to a total return of 15.3 percent.

That pales in comparison to the 26.4 percent and 29 percent price-only and total return figures for the S&P 500 Index. And it’s softer than the gains posted by Japanese, German and Spanish stocks this year.

Australia looks quite good, however, compared to Canada, the UK and France.

Things look pretty fair to middling, then, when you stack up the Australian share market, as measured by the S&P/ASX 200, versus other major equities markets in local currency terms.

The problem for us US-based investors is that currency movements have a real-world impact. And this year the impact has been sudden and unpleasant.

But the long-term value of the Australian dollar continues to be supported by relatively strong domestic economic fundamentals. And, as we’ve noted on many occasions, global central banks continue to add to their Australian dollar-denominated holdings, which builds in a higher floor under the currency than ever before.

We expect that, barring a global financial calamity along the lines of the 2008-09 Great Financial Crisis and Great Recession (the latter of which, it should be noted, Australia was fortunate enough not to participate) the Australian dollar has seen its bottom.

That’s doesn’t mean we’ll see it shoot straight to parity with the US dollar and beyond in 2014. But assuming what appears to be a solidifying US economic situation and a rebounding Chinese economic situation mature into full-fledged and durable recoveries, the world will get nearer its longer-term consumption habits.

And that bodes well for the Australian economy and its currency.

In Focus takes a look at notable names from each How They Rate sector, with a look back at what’s happened in 2013 and a look forward at what we anticipate for 2014.

Sector Spotlight

Sydney Airport’s (ASX: SYD, OTC: SYDDF) financial and operating results in the 21st century evidence long-term resilience supported by strong growth in passenger numbers. This traffic growth has been driven to a large degree by Chinese tourism.

Sydney Airport hasn’t suffered the significant economic shocks that many international peers have in recent years. Its total traffic has increased steadily during the period, as opposed to declines for other airports.

Based on its solid record of growth through a challenging period for the global economy and its strong position in the China-Australia bilateral relationship, we’re adding Sydney Airport to the AE Portfolio Aggressive Holdings.

Since 2009 it’s paid a consistent regular annual dividend of AUD0.21 per share, with a special dividend of AUD0.125 per share paid in 2010 and return of capital payment of AUD0.80 per share paid in 2011.

Even after the strong run at current levels Sydney Airport is yielding a solid 5.6 percent.

With a passenger throughput of approximately 36.9 million, it’s Australia’s largest airport.

And it’s quite literally Australia’s primary gateway with China.

We have more on Sydney Airport in this month’s first Sector Spotlight.

Conservative Holding Envestra Ltd’s (ASX: ENV, OTC: EVSRF) sustainable, long-life natural gas distribution operations are the basis of secure, reliable returns to shareholders.

Envestra has consistently spent upward of AUD100 million per year and more recently around AUD200 million to extend its networks to reach to new housing developments and to upgrade older pipelines in established areas.

Despite recent declines in natural gas consumption in Australia, Envestra is well positioned to benefit from longer-term trends that favor cleaner-burning fuels as well as a rebound in usage as efficiency efforts are maximized.

The company announced that fiscal 2014 dividends would be increased to AUD0.064 per share, up 8 percent from AUD0.059 for fiscal 2013.

Management originally guided to NPAT growth of nearly 30 percent for fiscal 2014 to AUD140 million, driven by increases in regulated rates that took effect on July 1, 2013, and further anticipated reductions in finance costs.

On Dec. 12, 2013, the company boosted its NPAT guidance to AUD145 million, noting that gas volumes to residential and commercial customers were higher than expected for the first five months of the fiscal year.

This month’s second Sector Spotlight focuses on Envestra.

News & Notes

Australia’s Economy Struggles to Find Its Footing: Although the Australian economy continues to underwhelm, policymakers are taking the sort of actions that augur well for long-term growth, notes 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 113 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
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