Australia is in the Southern Hemisphere, which means its seasons are roughly the opposite of ours up here in the Northern Hemisphere.

And that means it’s warm and sunny Down Under while we here on the East Coast of the United States gird for the onset of winter.

Technically the Australian spring lasts from September to November. The “springtime” in our headline refers not to seasons, however, but the bouncy equity markets we’ve seen during the fourth quarter.

The Australian Securities Exchange/Standard & Poor’s 200 Index has posted a solid 4.47 percent local-price-only gain from Sept. 30, 2012, through Dec. 14, 2012, and a total return of 5.25 percent.

Accounting for the stronger Australian dollar during this timeframe, the US dollar price appreciation is 6.31 percent, the total return 7.11 percent.

The rally has gotten stronger since the post-US-election trough for global equities, the ASX/S&P 200 popping by nearly 6 percent in local terms and more than 8 percent in US terms since Nov. 15.

We’re happy for the rally, really we are. But we remain cautious amid what remains a decidedly mixed environment for economic data, as we’ve noted consistently in this space, and an increasingly sclerotic political context for at least one major jurisdiction, as negotiations with significant implications for the global economy drag on in Washington, DC.

The drama over the US fiscal cliff has certainly been overplayed. There will be no immediate plunge over a precipice come Jan. 1 should President Barack Obama and Speaker of the House John Boehner fail to hammer out a deal that avoids the legislated tax increases and spending cuts written into a bill that solved last year’s debt-limit-increase dilemma.

That doesn’t mean, however, that the type of gamesmanship–even brinksmanship–engaged in, where the inside-the-beltway crowd simply knows the sausage-making will push right up to the absolute drop-deadline, reflects poorly on the world’s biggest economy and its most important geopolitical actor.

Exposure to Australia is, in part, about protection from erosion of the value of the US dollar.

But in larger part we’re interested in high-quality, dividend-paying companies with clearly identifiable cash flows.

And the numbers for 2012, as we detail in this month’s Portfolio Update and the In Focus feature on the broader How They Rate coverage universe, confirm that we’re on the right patch.

As for macro data, Australia, though it is slowing somewhat, a step behind what now appears to be a reviving Chinese economy, continues to confound hyper-skeptics.

But its story also fits the good news-bad news–or bad news-good news–paradigm to which we’ve grown so accustomed during this still-unsatisfying recovery from the Great Financial Crisis/Great Recession of 2007 to 2009.

To wit: The Australian Bureau of Statistics (ABS) reported last week that third-quarter gross domestic product (GDP) expanded by 3.1 percent year over year, but that’s slower than the revised growth rate of 3.8 percent for the second quarter. Quarter-over-quarter growth was 0.5 percent, slower than the 0.6 percent rate of growth from the first to the second quarter of 2012.

However, the ABS followed up on Dec. 6 with a labor statistics report for November that surprised to the upside: The unemployment rate fell to 5.2 percent in November from 5.4 percent in October. Economists had expected the rate to rise to 5.5 percent. Australia added nearly 14,000 new jobs against expectations for a flat number.

In the US gas prices are falling, which will put additional discretionary cash in consumers’ hands during the holiday shopping season. November retail sales exceeded expectations, with a gain of 0.5 percent versus a consensus estimate of 0.3 percent.

Despite continuing and expanding non-traditional monetary policy by the US Federal Reserve, inflation measures appear to be contained, with the Producer Price Index and the Consumer Price Index posting benign readings for November.

Most critically, initial claims for unemployment insurance continue to trend lower.

The “but” this month is likely colored by shenanigans in Washington: The National Federation of Independent Business Small Business Optimism Index dropped 5.6 points in November, bottoming out at 87.5.

The two major events in November were the national elections and Superstorm Sandy, which devastated parts of the East Coast. To disentangle these, the results for the states impacted by Sandy were excluded from the computation for comparison. When separating the hurricane-impacted states from the remainder, the data makes clear that the election was the primary cause of the decline in owner optimism.

There’s solid news from Europe, as German investor confidence bounced and measures of euro zone manufacturing and services activity inched up to the highest readings in five months. These readings, however, are still below 50, indicating “contraction.” European inflation is also under control, and Greece continues to hang on.

Australia’s biggest trading partner handed up its own mixed bag. On one hand, trade and bank loan data from China came in lower than expected.

On the other, the HSBC Flash Purchasing Managers Index for December rose to 50.9, the highest level since October 2011 and the fifth straight monthly gain.

The flash survey provides more evidence that Chinese growth is reviving.

Portfolio Update

Thanks to an emerging fourth-quarter rally Down Under, 2012 has shaped up as another banner year for our Australian Edge Portfolio.

There’s still half a month left in the year. But to date the 24 current members are in the black by roughly 24 percent on average. Two recommendations have tacked on total returns of better than 70 percent. And nearly half of our stocks are up at least 30 percent.

Five recommendations–all Aggressive Holdings–are still underwater for the year. The common denominator of that side of the Portfolio is natural resource exposure, and slowing growth in China this year has proved to be a powerful headwind for these companies.

Even these stocks, however, have perked up in recent weeks. As a result, most have pared their losses, and a few have actually moved well into the black.

Some credit for the rally goes to the strengthening Australian dollar. The currency now trades for a shade less than USD1.06. That’s up from slightly less than USD1.04, where it stood at the end of the previous quarter, and is a gain of about 3.5 percent from the start of 2012. That amounts to an incremental 3.5 percent increase in share prices and dividends in US dollar terms.

The real underlying gains in these stocks, however, are thanks to strengthening businesses, rising dividends and greater investor awareness of their superior prospects.

And while we continue to expect a stronger Australian dollar in coming years–thanks to the country’s conservative fiscal policies and the growing value of its resource bounty–it’s the internal growth of companies that will ultimately determine our returns.

Here’s what’s happening with our Conservative and Aggressive Holdings as 2012 winds to a close.

In Focus

This may not be the year the world comes to an end, as the now-famous Mayan prophecy suggests, but 2012 must nevertheless rank at least among the most interesting periods in the 21st century.

Despite it all, global equities are staging an impressive late fourth-quarter rally, spurred some days by optimism about Europe, on others by signs of a China gathering new momentum, on still others because of positive news on Obama-Boehner negotiations.

In 2012 the ASX/S&P 200 is up 12.98 percent in local price-only terms, with a total return of 18.36 percent. A relatively modest rise in the aussie has pushed the US-dollar capital appreciation to 16.44 percent, the total return to 21.98 percent.

It’s too early to declare the worst over. But recent data, including an upside employment surprise for November, suggest Australia is responding to China’s rebound.

This month’s In Focus takes a sector-by-sector look at performance for the AE How They Rate coverage universe from Dec. 30, 2011, through Dec. 7, 2012, the most recent date for which complete data was available at the time of our research.

For the relevant time frame the ASX/S&P 200 Index produced a total return in US dollar terms of 20.14 percent, the S&P 500 Index 15.19 percent, the MSCI World Index 14.78 percent. Our Conservative Holdings posted a total return of 34.14 percent, the Aggressive Holdings 6.29 percent.

Altogether the average total return for current Portfolio Holdings was 22.54 percent to the positive.

Comments in this month’s How They Rate include total return figures for each member of the coverage universe from Dec. 30, 2011, through the close of trade in Australia on Dec. 7, 2012. This is the capital gain or loss plus dividends in US dollar terms for the period described.

We’ve been in on some of our big winners, we’ve cut losses early where we made mistakes and our Portfolio picks are well positioned to grow and generate sustainable dividends for the long term.

Sector Spotlight

AE Portfolio Conservative Holding Transurban Group (ASX: TCL, OTC: TRAUF) boosted its fiscal 2013 interim distribution by 6.9 percent this month.

It’s the seventh successive payout increase (including interim and final distributions) since the company retrenched under new management during the first half of fiscal 2009, and it’s further validation of a new strategy that’s seen the Melbourne-based toll road developer reduce debt, add assets and build a foundation for long-term growth.

The board, “consistent with the expectation of continuing free cash flow growth,” also confirmed previous guidance that Transurban’s distributions for fiscal 2013 will total AUD0.31, with at least 95 percent cash coverage. That’s 5.1 percent higher than the fiscal 2012 total of AUD0.295, which in turn was 9.3 percent higher than what was paid for fiscal 2011.

CEO Scott Charlton took over for Chris Lynch in July 2012. Mr. Lynch was responsible for righting a ship that was listing under its debt burden, transforming it into a leaner machine with a strong balance sheet, a healthy growth pipeline and a commitment to controlling costs and making disciplined investments.

Mr. Charlton has been “hands on” during his brief tenure, making site visits to Transurban’s Australian roads and also visiting its two key US projects before signing off on the financial closings in support of these investments. His vision for the company is consistent with the trajectory established by Mr. Lynch.

There’s more on Transurban Group in the first of this month’s Sector Spotlights on the Industrials group.

AE Portfolio Conservative Holding Cardno Ltd (ASX: CDD, OTC: COLDF) came under a great deal of selling pressure in mid-November after Managing Director Andrew Buckley announced at the company’s annual general meeting that management expects net profit after tax (NPAT) for the first half of fiscal 2013 to be in the range of AUD36 million to AUD40 million.

Cardno posted fiscal 2012 first-half NPAT of AUD36.1 million and fiscal 2012 second-half NPAT of AUD38 million.

The international infrastructure and environment services company got back on its horse, however, and remains on a solid long-term growth path.

As has been clearly demonstrated, Cardno is at risk to a slowing Australian economy, where it still generates significant fee revenue. Recent indicators suggest sluggishness at home will persist into calendar 2013 but that efforts to stimulate the Chinese economy are having positive knock-on effects Down Under.

Cardno’s efforts to diversify its professional offerings and the geographic reach of same have positioned it well to weather a downturn in Australia. The recent guidance for the first half of fiscal 2013 was disappointing, but it must be considered in light of what’s been an incredible record of revenue, profit and dividend growth.

There will be some slowing of Cardno’s pace of expansion. But management has been consistently conservative with its dividend policy; barring a real disaster along the lines of the 2007-09 global meltdown the payout is safe at these levels. Based on Cardno’s track record modest growth is not out of the question.

There’s more in this month’s second Sector Spotlight on Industrials.

News & Notes

The Rate-Cut Rally and the Future of the Aussie: The Reserve Bank of Australia has cut its benchmark overnight interest rate by 175 basis points since November 2011. But the Australian dollar continues to strengthen against the US dollar.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced dividend cuts during the recently concluded earnings reporting season Down Under, lowered earnings guidance in recent weeks as well as those that cut payouts during their most recent reporting period.

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 Australian companies 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
• 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
Co-Editor, Australian Edge

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