It’s déjà vu all over again.

Although invoking the great Yogi Berra this time of year ought to be in honor of Opening Day festivities taking place in ballparks all over America, it seems entirely appropriate, too, to make a little and also shed some light on what’s becoming another right of spring, the panic-driven selloff.

Last year around this time investors were reacting–or overreacting–to news from Japan and the Middle East. Later in the summer it was Standard & Poor’s making the questionable move of cutting its rating on US credit from AAA.

More recently sovereign debt concerns in Europe have colored virtually everything, because a contagion that big, as we experienced not so long ago, is impossible to contain in this era of interconnected markets.

And now we’ve moved on to the prospect for a hard landing for the Middle Kingdom.

China reported that gross domestic product (GDP) in the first quarter expanded by 8.1 percent. Expectations were for something along the lines of 8.3 or 8.4 percent, though some hoped for 9 percent, and 8.1 percent is the slowest pace of growth for China since the first quarter of 2009.

But at the end of the day, 0.2 percent one way or another is not of great consequence for a GDP figure, particularly if that figure is as high as 8.1 percent.

In other words, there’s nothing to disrupt the soft-landing scenario.

The Australian dollar traded in a wide range this week, reacting first to the negative carry-over from the Friday, Apr. 6, US Dept of Labor Bureau of Labor Statistics report that disappointed markets. Strong domestic hiring numbers released by the Australian Bureau of Statistics provided a bounce and cooled hopes for a Reserve Bank of Australia rate cut in May.

China’s GDP report produced an appropriately mixed reaction, surging early then settling into a lower trading range for the day.

Two steps forward, one–or one and a half–steps back: that’s the way it’s been, that’s the way we should assume it’s going to be. Knowing this we can prepare to establish positions at our prices when the market sells off.

Portfolio Update

The best way to get exposure to a foreign market, including Australia, is to build a portfolio of solid businesses. You never know what you’re going to get with an exchange-traded fund (ETF) or a traditional mutual fund.

Our model Portfolio is divided into Conservative and Aggressive selections. In general Conservative Holdings are the best choice for those concerned mainly with income and safety. Aggressive Holdings, by contrast, are well positioned to deliver explosive returns under the right market conditions, so long as their underlying businesses stay on track.

Our initial strategy when we launched this letter was to buy our “8 Income Wonders from Down Under,” preferably by taking a one-third stake initially, followed by another third a month later and a third a month after that. This has proven to be a very profitable strategy, as almost every one of these stocks has turned in an explosive performance. A better approach now is to buy our “Sector Spotlights” each month. They do vary in terms of risk, so not all Spotlights are going to be suitable for all investors. But over time investors of all stripes will be able to collect all the stocks they need to lay a solid foundation in the Australian economy and market.

Remember that no US or Canadian investor should have more than 20 percent of their portfolio in Australia, just as they would never have a larger portion in any single sector be it utility stocks, Canadian stocks or master limited partnerships.

In Focus

Australian Edge Co-Editor Roger Conrad refers to rising demand for electricity as the surest trend in essential-service investing. Although it doesn’t qualify as a “utility” in the traditional sense, “health care” is inarguably essential.

And perhaps the most powerful force there is–demographics–provides a foundation for long-term growth for well-placed, well-run health care businesses.

Australia’s health care sector is a solid breeding ground for long-term wealth-builders: The six companies from the sector tracked in How They Rate generated average dividend growth of more than 13 percent in the five years from Mar. 30, 2007, to Mar. 30, 2012. And not one of the four we recommend this month–including Conservative Holding CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–has cut its dividend during this half-decade, one of the most tumultuous periods in market history.

Demographics, Disease and Dividends has details on how to profit in Australia’s health care sector, including a new addition to How They Rate coverage, Cochlear Ltd (ASX: COH, OTC: CHEOF, ADR: CHEOY).

Sector Spotlight

We’re going back to the beginning this month, focusing on two companies that were part of the original Australian Edge Portfolio, Conservative Holding Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY) and Aggressive Holding New Hope Corp Ltd (ASX: NHC, OTC: NHPEF).

Telstra has yet to reveal what it will do with the estimated AUD11 billion it will receive from Australia’s National Broadband Network (NBN) for its copper-wire infrastructure and customers. Speculation centers on a share buyback, as such a move would be accretive to earnings per share. Others hope for special or increased dividend rate.

Management has signaled, however, that its priorities are balance-sheet flexibility and building out its network. Whatever the case may be, Telstra is a solid wealth-builder for the long term and an appropriate holding for investors of all risk tolerances.

It’s trading above our USD3.20 buy-under target for the Australian Securities Exchange (ASX)-listed and US over-the-counter (OTC)-traded shares and our USD16 target for the US American Depositary Receipt (ADR). We are constantly evaluating the stock, however, and will provide a more definitive action plan once we have clarity on how management plans to deploy its NBN payments.

New Hope Corp, meanwhile, has come all the way back to where we initially established a position in the stock on Sept. 26, 2011. The stock has etraced the move it made after management, responding to unofficial inquiries, initiated a formal auction process. That process didn’t gin up the bid major shareholders wanted, so management ended it in late February.

A more fundamental challenge comes in the form of newly elected Queensland Premier Campbell Newman’s opposition to the planned expansion of New Hope’s Acland mine. Mr. Newman, as part of his campaign platform, vigorously rejected the idea of expanding coal mining operations that would implicate what he called critical crop lands in Queensland’s “bread basket.”

His campaign talk has yet to translate into official government policy. Two mining projects in southern Queensland’s Darling Downs are proceeding with developments, despite Mr. Newman specifically saying they wouldn’t go ahead four days after his election, identifying New Hope’s Stage 3 development at Acland and a AUD3 billion coal-to-liquids project at Felton sponsored by privately held Ambre Energy Ltd.

But Ambre confirmed that exploratory drilling had continued into early April. A spokesman said the company hadn’t formally been notified by the government of any changes and the project remained in the early investigation stage.

“Despite some assertions to the contrary, the company has not been formally notified by the Queensland government about any legislative changes which may affect the project,” Ambre’s spokesman said.

A spokesman for the New Hope said that though the company was aware of Mr. Newman’s statement there had been no formal contact with the government; New Hope is still seeking a meeting to establish what the exact ruling would be.

New Hope–which boosted its interim dividend by 14 percent–is a buy under USD6.

News & Notes

Follow the Central Bank: After it met on Apr. 3 and left is “cash rate” unchanged but strongly hinted it felt Australians’ economic pain it was widely believed the Reserve Bank of Australia would cut its target overnight benchmark on May 1. Unexpectedly strong job creation in March reduced expectations of a cut from the current level of 4.25 percent.

The last–and most important–piece of the data puzzle is the Australian Bureau of Statistics’ inflation report for March, due Apr. 24.

The Dividend Watch List: The Dividend Watch List this month includes an update on How They Rate companies that announced reduced dividend compared to the prior corresponding period during the recently concluded earnings season, whether the company announced fiscal 2012 first-half or 2011 full-year results.

Twenty-one of the now 108 companies we cover paid less to shareholders than they did a year ago.

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 108 Australian companies–note that we’ve added hearing implant maker Cochlear Ltd (ASX: COH, OTC: CHEOF, ADR: CHEOY) to coverage under Health Care this month–organized according to the following sector/industries:

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

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. If I can’t answer your question, chances are–high–that Roger can, and I know how to find him.

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David Dittman
Co-Editor, Australian Edge