Punch-drunk but still standing, the global economy continues to show signs of wear, tear and slowing. But it’s still on its feet, and if you take time to look and can muffle the noise coming from the end-is-nigh hordes it becomes plain that we’re in a period of sluggish and jagged growth–maybe not dancing and stinging, but at least bobbing and weaving.

Times like these validate all over again a time-worn strategy for building wealth: Buying and holding high-quality businesses that pay sustainable and growing dividends. It’s good defense and good offense. That’s what we’ve done in the US since 1990, and that’s what we’ve done in Canada since 2004. And that’s what we’ll do in Australia starting here in 2011.

At the outset let’s make clear that this is not 2008.

Stocks took a beating after Jul. 7, when the S&P 500 closed at 1,353.22, within striking distance of the 2011 closing high of 1,363.61 established Apr. 29. From there until Oct. 3’s 2011 closing low of 1,099.23 the most widely followed index in the world shed nearly 19 percent. The S&P/Australian Securities Exchange 200 Index, the consensus benchmark in the Land Down Under, surrendered about 23 percent in US dollar terms.

During this time the world’s been treated to an object lesson in dysfunctional US politics that happened to have real-world implications, as debate over what was once a perfunctory step for previous legislatures to increase the federal borrowing limit became an ideological struggle with US credibility at stake. Although Standard & Poor’s shortly thereafter followed through with a downgrade of Uncle Sam from AAA to AA+, the impact in credit markets has been far from what those hordes would have anticipated–or even, perhaps, liked–as the interest rate on the US Treasury note is only now bouncing back after an historic stay below 2 percent.

When investors fly from risk, they still go to US government-backed paper. But when it’s “risk-on,” high-quality dividend-paying stocks backed by solid businesses–particularly those that operate in currencies backed by strong fundamentals–are among the first, strongest rebounders.

The prolonged dominance of the “risk-off” sentiment dragged the resource-backed Australian dollar back below parity with the US dollar from late September to early October, for the first time since March. Recent economic data, including upside surprises for US second-quarter gross domestic product (GDP) and September employment, as well as positive signs out of Europe, have “risk-on” back in the lead.

Market ups and downs have been compressed to an unprecedented speed and severity in the aftermath of the searing years 2007 to 2009, creating a feedback loop based on fear succumbing to more fear with each negative report. But the reverse is true as well: Markets bounce beyond reason on news that only suggests things aren’t getting worse.

But here’s why this is not 2008.

The kind of financial shock that spreads from Greece, takes out Italy and Spain, blows a hole in the European economy and threatens to undermine the flow of credit in the US could result in a recession. But at this point the market isn’t pricing this risk; there doesn’t appear to be the kind of stress in the financial system that suggests a crisis is imminent.

The HSBC Financial Clog Index measures the aggregate level of stress in the financial system based on four factors: interbank stress, measured by the TED Spread and the LIBOR-OIS Spread; financial institution default risk, measured by US financial credit-default swap spreads; mortgage agency credit spreads, measured by credit spreads for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE); and equity volatility, measured by the Chicago Board Options Exchange Volatility Index, or VIX.

It’s clearly elevated, but the Clog Index is nowhere near the levels we saw at the height of the financial crisis during the winter of 2008-09. A precipitating event–failure of negotiations with Slovakia and over the extension of commitments first made in July 2011 that are now insufficient to deal with Greece’s rapidly accumulating shortfalls could qualify–could push it there.

But even in that event, there can be no crisis where credit isn’t absolutely necessary. We buy businesses, and the businesses we cover–particularly those we recommend in the Portfolio–won’t be exposed even if the remote possibility of another 2008-style credit crunch arises.

There is also concern about China and a “hard landing” and what this would do to global growth. It’s important to note that the emerging market industrial production slowdown is policy enforced, due to concerns about inflation. Emerging market growth on average is still strong, forecast to be around 7 percent in 2012. And if things slow to an uncomfortable level policymakers can reverse prior decisions and get less restrictive, particularly in China.

Furthermore, global manufacturing and down-the-line retail sectors have no excess inventory relative to the pace of sales to work through; there will be no de-stocking event with negative knock-on impact on other sectors and regions.

Fears of a European sovereign debt contagion persist, and there’s no assurance a deal will be reached that adequately recapitalizes vulnerable institutions, prevents the spread of debt contagion and staves off the onset of another global financial crisis, particularly in a political system where a libertarian faction in Slovakia can hold 16 other EU members hostage.

But let’s focus on what we know–or what we think we know. The US hasn’t stopped growing, but it is a slow-growth environment for the world’s biggest economy. Resource-hungry China has cash and will use it to secure those resources for a rapidly evolving middle-class population. The macro situation continues to look like it has for more than two years, patchy data, suboptimal hiring in the US, but recent data suggest we’re not heading into recession. Europe is getting closer to a “solution” to the Greece problem.

Meanwhile, Australia continues to surprise to the upside. Unemployment fell to a lower-than-expected 5.2 percent in September, as the domestic economy added more jobs than forecast. The only developed country that didn’t sink into recession from 2007 to 2009 is poised for further growth once the global economy gets its bearings back.

In Focus

The burgeoning auction for Australian Edge Portfolio Aggressive Holding New Hope Corp Ltd (ASX: NHC, OTC: NHPEF), which produces thermal coal used to generate electricity, is a sign of what’s to come once the global economy is on solid footing again. China’s ever-expanding demand for resources remains the catalyst for a global search for energy assets. Coal will remain a key input in the global power equation for decades to come, and Australia has a lot of it.

New Hope stock was cheap on a price-to-book basis, it has an ample net cash position of AUD75 million, meaning access to capital isn’t an issue. Its reserve and production profile, including an in-demand single product, top off an attractive package for a potential acquirer.

China Petroleum & Chemical Corp Ltd–better known as Sinopec (NYSE: SNP)–recently announced a deal to buy Canada-based oil and gas producer Daylight Energy Ltd (TSX: DAY, OTC: DAYYF) at an announced premium of 72 percent, further sign that China and other resource-hungry entities are on the prowl for assets left cheap by the recent global selloff.

In Focus takes a look at Australia-based Basic Materials companies that fit a profile similar to New Hope’s: production of a key resource production, with balance-sheet characteristics that might make it attractive or vulnerable, priced cheaply relative to underlying value.

Sector Spotlight

Sector Spotlight–a play in two acts, if you will–includes details this month on a pair of additions to the Australian Edge Portfolio, Health Care company CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY) and Basic Materials company Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY).

Portfolio Update

What happens at the macro level is an aggregation of what’s happening at the micro level. And against all that’s going on around them the eight charter members of the Australian Edge Portfolio are distinguishing themselves as companies and as a group even in the few days since the Sept. 27 preview issue, turning in market-beating individual performances and besting relevant benchmarks on average as well.

Portfolio Update takes a look at where the original eight stand now, including recent dividend information and analysis of the debt situation for each Holding.

News & Notes

This section feature short bits on a wide variety of topics of interest to investors in Australia.

A Carbon Tax Down Under: The lower house of Australia’s parliament passed a carbon tax this week. Here’s the lowdown on what it means for Australia-based companies.

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.

The 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. Next month, in the November Australian Edge, we’ll debut The Dividend Watch List.

For now, here’s a look at changes in How They Rate–Safety Ratings and advice, including “buy under” prices–since the Sept. 27 preview issue.

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 S. Conrad

Editors, Australian Edge