The Standard & Poor’s/Australian Securities Exchange 200 Index is up 11.1 percent in US dollar terms since Australian Edge debuted Sept. 26. The eight charter members of the AE Portfolio have generated an average return of 15.6 percent. Numbers for the four companies added in the October and November issues are more modest, but we continue to be encouraged by our picks’ responses in this short period of time amid a complex array of global problems.

There still is no definitive solution to the eurozone crisis, nor is there likely to be one where politics is concerned. There will, however, become a stasis that preserves in large part the European Union as we know it and in fact extends the current relationship to include firmer fiscal ties and a better blueprint for an effective central bank.

Growth in China remains one of the most intriguing parlor games going, as it can progress along many lines, be it plumbing suspicion about the quality of government-produced data to begin with, exploring the durability of the urban migration or the depth and breadth of the Communist Party of China’s commitment to maintaining social order and its place atop it. Our base-case scenario, arrived at in consultation with our colleague Yiannis Mostrous, is that Chinese officials will do what it takes to guarantee a soft landing for the Middle Kingdom. They have several tools at their disposal, including easing bank reserve requirements, which has been done, and reducing short-term interest rates, which will continue should conditions merit.

As frustrating as the virtual shutdown of the US government is, we know nothing will be done between now and Nov. 6, 2012. That means American politicians can’t break anything, either, but the reality is the leadership void caused by constant Republican-Democratic can have extremely negative consequences, such as Standard & Poor’s slashing Uncle Sam’s credit rating on account of gridlock in Washington, DC.

Whether S&P’s move was truly warranted or not it resulted in a great deal of market tumult, all of which revealed the costs of borrowing for the US government to be cheaper after its so-called downgrade.

The case for Australia rests on its ample resources and the ability of its government to maintain efficient structures that allow for the widespread dispersal of their wealth. This is a messy business, it never moves in a straight line, it necessarily involves taxation and some form of “redistribution,” and there will always be parties fighting against or for more or less. It goes without saying that the Gillard government seems bent on destroying Undiscovered Australia even before global investors can enjoy it.

AE stepped into the medium-term aftermath of the S&P event as well as the early stages of the autumn heating in the European crisis and the pick-up in the debate about a low-carbon future in Australia. But, as the numbers recited above reveal, our choices have been rewarded.

The Australian Bureau of Statistics (ABS) reported that the economy Down Under expanded by 1 percent during the third quarter and revised the expansion for the June quarter upward to 1.4 percent from 1.2 percent. In the 12 months through Sept. 30 Australia’s gross domestic product (GDP) grew by 2.5 percent.

With USD450 billion in mining and energy projects either underway or in planning, the country’s resource-focused companies continue to drive growth. There is, of course, the risk that Europe could tip into recession, and/or that Chinese policymakers’ response to slowing growth proves too little, late. Under worst-case global economic scenarios triggered by either or both of these critical regions some of the projects would be postponed or cancelled entirely. We saw this in 2008-09.

But we’re not near a 2008-style implosion. For one thing, the US continues to show signs of finally establishing some solid momentum, though election-year politics continue to threaten what remains a delicate recovery. And solid businesses have had ample opportunity to refinance balance sheets, establish new lines of credit or otherwise take on debt at what remain the lowest rates in history.

Amid all this uncertainty, the Australian economy continues to battle back from devastating floods a year ago, though Queensland’s coal mines, a key engine of growth, are still at only about 80 percent of capacity, with overall volumes in 2011-12 likely to fall short of forecasts. Should headwinds strengthen the Reserve Bank of Australia has plenty of room to apply traditional monetary policy responses, even after cutting its target overnight interest rate in November and December, by 25 basis points each time, bringing the rate to 4.25 percent.

The bottom line is Australia is still on track to be one of the fastest-growing economies in the developed world in 2012, with inflation contained and low unemployment the envy of most major economies.

In Focus

The Australian consumer is the last in the developed world to finally show some fatigue, more than three years after the peak of the global financial crisis. Certain pockets of the Consumer Services space have been hit hard, some stocks suffering double-digit percentage declines in recent days on poor earnings forecasts. That’s left many with eye-popping yields.

Retail sales overall and a consumer mood that continues to rebound even after scary declines offer hope that, despite the jolting news from the higher-end electronics folks, Australia will be able to avert, again, an official recession. A lot depends on factors outside the Land Down Under–specificallly China and Europe.

This all misses the essential point of focusing on high-quality businesses: They can generate cash and build wealth under almost any circumstances. Not all variables can be accounted for, but companies and management teams that prepare the best often seem to enjoy the best fortune in the long run, too.

It helps, for example, that consumers can afford and are often poised because of the grind such time become to go to the movies. It’s better when Hollywood is churning out fare for which people will pay more than once for the privilege of viewing it on the big screen.

Best when the company running the screens knows how to diversify revenue streams so it’s not subject to the vicissitudes of Hollywood. Running movie theaters is not a recession-proof business. Running movie theaters well as part of a diversified entertainment operation is.

That’s what Amalgamated Holdings Ltd (ASX: AHD, OTC: AMGHF) has done on its way to outperforming the broader Standard & Poor’s/Australian Securities Exchange 200 Index by nearly 50 percent over the past five years.

Sector Spotlight

Telecommunications

If “dividend growth” is the phrase of the month, M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF) would have to be in the argument for top of the class, with impressive one-year (60 percent), three-year (47.36 percent) and five-year (43.93 percent) growth rates.

After a decade of rapid organic and acquisition-led growth on the operations side, M2 remains well-positioned to boost cash flow and investor payouts.

Now paying AUD0.16 per share, M2 Telecommunications Group is a buy under USD3 and new addition to the Australian Edge Portfolio Conservative Holdings.

Basic Materials

M2 and fellow Portfolio addition Mineral Resources Ltd (ASX: MIN, OTC: MALRF) would make a fine valedictorian/salutatorian of class ranked on dividend growth, as its rates (one-year 110 percent, three-year 29.48 percent, five-year 103.62 percent) are virtually indistinguishable fro the telecom’s.

It now pays AUD0.42 per share per year and is executing on a transformational move that holds significant potential for shareholders.

A new Aggressive Holding, Mineral Resources is a buy under USD12.

Portfolio Update

We had the good fortune to launch Australian Edge on Sept. 26, close to the peak of the US dollar’s post-S&P downgrade surge. Since then we’ve seen a dramatic rise in the aussie from less than USD0.94 to USD1.07 in late October. What followed was another leg down to around USD0.97 by late November, a jump to USD1.02 in early December and finally a drop to a bit below parity this week.

As a result our initial eight positions have enjoyed a roughly 5 percent boost in the Australian dollar since entry. The two stocks we added in our second issue on Oct. 14 are down by roughly as much, and the pair added in the Nov. 11 issue is down a like amount. Given that eight positions were added in September versus four since, we’re looking at a slightly positive currency impact on overall Portfolio returns.

News & Notes

Gillard Government Speeds Steel Transformation Plan: BlueScope Steel Ltd (ASX: BSL, OTC: BLSFF) will apply for AUD100 million in assistance after the Australian government’s opened up its application process earlier than anticipated for a program under its Steel Transformation Plan to help companies transition to a low-carbon future. BlueScope, with this AUD100 million, AUD600 million in new equity capital and proceeds from an anticipated AUD100 million in asset sales, might make it to that future.

How to Place an Order: If you’re not buying AE recommendations on the Australian Securities Exchange (ASX), rather focusing your efforts on the US over-the-counter market, your best course is to use “buy-limit” orders to ensure your trade is executed at a price below our recommended buy-under targets.

Dividend Watch List: The business of Australian Edge is to identify businesses capable of paying sustainable and growing dividends over time. The corollary of this mandate is to identify those businesses that are not capable sustaining or growing dividends.

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.

Note that we’ve added consumer electronics outfit JB Hi-Fi Ltd (ASX: JBH, OTC: JBHIF) to How They Rate coverage this month under Consumer Services. It’s a hold after pre-announcing a 5 percent decline in fiscal 2012 first-half profit. This followed a reduction in its final dividend for fiscal 2011 from the amount paid in fiscal 2010.

JB isn’t a proxy for the entire sector, however, nor does it really tell us much about the Australian consumer overall. It sells a lot of things that are subject to rapid technological change, and so its variables aren’t necessarily worthy of bearing broader lessons.

In Closing

Thank you for subscribing to Australian Edge. We hope you find the information we provide both informative and profitable. And we look forward to hearing feedback about how we can improve the service.

David Dittman and Roger Conrad
Editors, Australian Edge