The fact that Australia hasn’t suffered a recession in more than 20 years is just the latest evidence in support of its nickname “The Lucky Country.”

That appellation, now 50 years old, was taken from the 1964 book of the same name by social critic Donald Horne.

Among other things, it’s been used in reference to Australia’s natural resources, weather, history, distance from problems elsewhere in the world and other sorts of prosperity.

At this moment, however, it appears the early 21st century commodities boom that drove growth in the Land Down Under has clearly downshifted, if not into outright bust at least into a transition period.

And adverse weather, as we detail in this month’s Portfolio Update, has upended fiscal 2014 for Australia’s largest publicly traded agriculture company, GrainCorp Ltd (ASX: GNC, OTC: GRCLF), one of our original “Eight Income Wonders From Down Under.”

Australia is making history as the host and agenda-setter for the ninth G-20 Heads of Government Summit, a two-day meeting already underway this weekend in Brisbane, Queensland.

One of the main topics for discussion in light of the historic agreement announced earlier this week between the US and China will be climate change, a problem that appears to impact every county in the world.

As Ari Charney notes in this month’s News & Notes, Australia continues to enjoy a housing boom, among other signs of prosperity.

But at a macro level, the two decades of continuous expansion may be under threat.

So sayeth Saxo Bank Chief Economist Steen Jakobsen and analysts at Morgan Stanley (NYSE: MS).

According to Mr. Jakobsen, the mining boom bred complacency over the past decade, and it’s now too late to avoid a recession in 2015.

Morgan Stanley says policymakers must act to counter rising unemployment.

Mr. Jakobsen believes that recession will create a sense of urgency that could lead to simplification of taxes and regulation and shift the political agenda away from big miners and banks toward small and medium-sized business.

The tricky path for the Reserve Bank of Australia (RBA) will be to provide stimulus via lower interest rates without exacerbating what many are calling a housing bubble.

Policymakers are playing a waiting game for low interest rates to gain traction beyond a surging housing market in the country’s eastern states. The RBA has kept its benchmark overnight cash rate at a record-low 2.5 percent for the past 15 months to boost growth and hiring.

The Australian Bureau of Statistics reported on Nov. 4 that the nation’s labor market had 24,400 fewer jobs in September than previously reported and the unemployment rate was 6.2 percent, rather than 6.1 percent, following a review of its methodology.

Housing, according to Mr. Jakobsen, has been the only sector to show meaningful growth as mining investment has slowed.

The RBA will likely have to cut its overnight cash rate to as low as 1.5 percent and introduce regulatory changes to control lending and rein in the housing sector.

If monetary and fiscal authorities fail to act, the Australian economy will expand by just 1.9 percent in 2015, with 1.5 percentage points of that coming from higher exports, and unemployment will climb to 6.8 percent.

Mr. Jakobsen professes optimism on Australia’s long-term prospects. Policy must shift in favor of high-productivity industries, including technology, and the country should re-emphasize the importance of education.

After more than two decades a little downturn may be just the jolt the Land Down Under needs.

Crude Stimulus

All that could be moot should energy prices stay low.

The plummeting oil price–this week crude approached four-year lows near USD75 a barrel–is a welcome and unexpected boost for most of the Australian economy.

As recently as late June, the commodity–Australia is a net importer–was trading at USD112.60 a barrel. Since then, the Organization of Petroleum Exporting Countries has kept its output high amid what many commentators are calling a global supply glut.

Australian motorists are paying less than AUD1.40 per liter at the pump, 18-month lows.

The prevailing opinion is that Australian and global economy will benefit from a sustained drop in the oil price.

All things considered–including the impact on local oil companies and government tax revenue–from an economic perspective it’s a big positive.

The knock-on effect for business is a significant, and we’ve already seen transport and airline stocks rebound on the promise of lower fuel prices. Household budgets will also get a lift.

There will be other macro-economic benefits as well, including lower expectations for inflation and downward pressure on interest rates, stimulating consumer demand.

Other drivers of disposable income haven’t been particularly favorable–weak jobs growth, rising unemployment, slow wage growth.

Energy stocks have been hurt. But other resource companies, including iron ore producers, will benefit from lower transportation costs.

Global growth may also pick up, and Australia would benefit if India and China started importing more.

Portfolio Update

GrainCorp Ltd (ASX: GNC, OTC: GRCLF), Australia’s largest publicly traded agriculture company, reported sharply lower fiscal 2014 revenue and earnings compared to fiscal 2013, as dry weather and smaller grain harvests on Australia’s east coast and lower grain volumes hurt the top and bottom lines.

This is not about the poor performance of the company. GrainCorp’s core business is storage and logistics, and lower harvests and weather have dramatic impacts on results.

That’s why it’s an Aggressive Holding.

CEO Mark Palmquist, who took over in October 2014, noted that, based on early results of the harvest now under way in Queensland, NSW and Victoria, challenging conditions will persist in fiscal 2015.

Management’s focus amid these trying circumstances will be on controlling costs. Mr. Palmquist also said present conditions provide a good opportunity to focus on new strategic initiatives and directions for the company to make it more resilient.

We also take a look at fiscal 2014 results for another original member of the AE Portfolio, Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY), and break down quarterly updates from Amalgamated Holdings Ltd (ASX: AHD), JB Hi-Fi Ltd (ASX: JBH) and Cardno Ltd (ASX: CDD, OTC: COLDF).

Portfolio Update has more on GrainCorp’s past, present and future, including an explanation of why we’re sticking with the stock.

In Focus

Share prices and valuations are depressed throughout the Basic Materials section of the AE coverage universe.

Sentiment is firmly against mining and resource stocks, with a lot of nervousness among investors who do hold shares in such companies, as pretty much the entire sector appears to be going over a cliff.

That doesn’t necessarily mean it’s full of deep-value plays.

Fundamentals for gold, iron ore and coal producers remain extremely challenging.

There are two metals where decent fundamentals and attractive valuations coalesce: nickel and copper. And there’s a unique materials story playing out in Australia focused on sandalwood and sandalwood oils.

We also spotlight a mining services name that at these levels, based on its operating and financial track record, looks like a compelling high-risk, high-reward story for aggressive investors.

In Focus takes a look at eight non-Portfolio Basic Materials companies that are trading at attractive valuations and are also supported by decent fundamentals.

Sector Spotlight

The promise of a stepped-up dividend policy supported by new production from and cash flow generated by its 29 percent stake in the Papua New Guinea Liquefied Natural Gas (PNG LNG) project is about to become reality–in a significant way–for shareholders of AE Portfolio Aggressive Holding Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY).

In prefatory remarks to his presentation to an Oct. 23, 2014, investor day/strategic review update, Oil Search Managing Directed Peter Botten noted that there would be “no surprises.” He then outlined a predictable, stable course that would see Oil Search maximize the still-considerable opportunity available to it in Papua New Guinea and with the expansion of PNG LNG.

The meeting’s excitement was generated by the announcement of a new dividend policy.

Oil Search now intends to pay out 35 percent to 50 percent of core net profit after tax (NPAT), which is net profit after tax excluding any material one-off adjustments to income, beginning with the final dividend for 2014.

The magnitude of the increase is in line with expectations; the timing is about six months ahead of when most analysts thought PNG LNG’s promise would start to pay off for shareholders.

Based on full-year 2013 and half-year 2014 core NPAT figures, Oil Search will likely declare a final dividend of USD0.12 per share for 2014 and interim dividend of USD0.12 per share for 2015.

Oil Search is a buy under USD9 on the Australian Securities Exchange (ASX) using the symbol OSH and on the US over-the-counter (OTC) market using the symbol OISHF.

Oil Search also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol OISHY. Oil Search’s ADR represents 10 underlying shares traded on the ASX and is a buy under USD90.

We have more on Oil Search in this month’s first Sector Spotlight.

Many A-REITs moved beyond the traditional passive income model to take on higher-risk investments, mainly in overseas properties, in the years leading up to the global meltdown.

In general, however, A-REITs are better capitalized, have more financing options, own higher-quality assets and have less risk exposure than they did five years ago.

That includes AE Portfolio Conservative Holding GPT Group (ASX: GPT, OTC: GPTGF), which recently boosted its 2014 earnings per share (EPS) growth forecast to 4 percent-plus from a prior target of 3 percent.

GPT has now pushed out to a new five-year high on the ASX of AUD4.21 as of Nov. 13, which probably confounds analysts that questioned the efficacy of the A-REIT’s plan to drive growth via the expansion of its funds management business.

The earnings upgrade was based on strong third-quarter results that were underpinned by transaction activity, improved retail sales growth at its shopping center and a strong uplift in leasing at its MLC Centre in Sydney, a solid sign of progress amid a “challenging” office leasing environment.

GPT Group is a buy on the ASX using the symbol GPT and on the US OTC market using the symbol GPTGF under USD4.

This month’s second Sector Spotlight focuses on GPT Group.

News & Notes

A Housing Market, with Extra Froth: Policymakers are fretting over Australia’s high-flying housing market, notes AE Associate Editor Ari Charney.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced reduced dividends during the recently concluded earnings reporting season Down Under.

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 111 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