It’s all too easy to slip into the role of fearful investor. After all, even the most seasoned market watchers sometimes find their fortitude faltering amid gut-churning volatility or soul-crushing economic news.

Still, Australia’s economy faces many challenges that are starting to weigh on its share market. Indeed, as my colleague David Dittman notes in this issue’s “In Brief,” there’s some risk that this year The Lucky Country’s enviable 23-year run without a recession could finally come to an end.

Although dramatic pronouncements about the rising risk of recession garner headlines, for now, at least, the consensus forecast is relatively mundane. And that’s a relief.

According to a survey of economists by Bloomberg, Australia’s economy is projected to grow by 2.5% in 2015. That’s a deceleration of two-tenths of a point from last year, and at least a half-point below the country’s long-term growth rate, which, depending on one’s definition of long term, seems to range from 3% to 3.5%.

But let’s put this year’s forecast in perspective: 2.5% is still a better showing than what the U.S. economy managed to produce in each of the past four calendar years.

And while Australia’s pace of growth is forecast to lag the U.S. this year, next year the tables are expected to turn, with the Land Down Under’s gross domestic product (GDP) growing by 3.1% compared with 2.8% for the U.S.

Though things are bad, they could be worse. Barring yet another economic shock (the global commodities crash has been quite enough, thank you), Australia should be fine.

Sure, we’re still smarting from the blows we’ve taken on some of our resource plays, especially since one of the major enticements of Australia’s investment story is the country’s abundance of resources.

But just because a key sector—one that’s driven the country’s growth over the past decade—is in retrenchment mode, that doesn’t mean other sectors can’t prosper.

For possible investment themes, I like to review the national accounts to see which sectors have posted the strongest trailing-year growth.

In Canadian Edge, I also like to look at which industries are posting the strongest job growth, but sadly, for some reason the Australian Bureau of Statistics makes it virtually impossible for non-statisticians to extract such data.

Anyway, as we’ll see in a moment, sector performance from an economic standpoint doesn’t always correlate with market performance, but it’s still a useful measure for generating ideas and focusing our approach.

Sector by Sector

So which sectors are tops? The information media and telecommunications sector is in first place, with growth up 9.0% through the end of 2014. And that strong performance was more than mirrored by Conservative Holding and Sector Spotlight M2 Telecommunications Group Ltd. (ASX: MTU, OTC: MTCZF).

After a nearly 15-month period of sideways trading, the diversified telecom’s stock started to go parabolic last August. Over the trailing year, shares of M2 have delivered a staggering total return of nearly 73% in local currency terms.

Of course, the depreciation of the Australian dollar has been a major drag on investment performance. But even adjusting for the exchange rate, M2 has given us a very respectable 46.5% total return over the past year. M2 is a buy below USD9.

Here’s where things might run counter to expectations. The second-place sector is mining, with growth of 8.9%.

Naturally, the end of the resource boom has led to a veritable bloodbath for mining-company stocks, as well as the shares of companies that provide services to the industry.

But many of the big projects that were initiated at the peak of the mining boom finally came on line over the past year, and miners are trying to offset falling prices with higher production volumes.

Though the price of iron ore, Australia’s top export, is down by about 50% from its trailing-year high, that hasn’t stopped mining giants BHP Billiton Ltd. (ASX: BHP, NYSE: BHP) and Rio Tinto Ltd. (ASX: RIO, NYSE: RIO) from aggressively ramping up production.

The two behemoths, both Aggressive Holdings, are engaged in a punishing race to the base metal’s eventual bottom, not just to battle each other for market supremacy but also to sideline higher-cost competitors.

As we’ve frequently written in the past, companies with sufficient scale and strong balance sheets can take advantage of sector downturns by expanding their market share and buying solid assets from troubled competitors on the cheap.

That doesn’t mean the big firms don’t get bloodied themselves. Shares of both BHP and Rio are currently trading well below their trailing five-year highs, and things could get even uglier.

But we wouldn’t bet against them over the long term. They clearly intend to use this difficult period to further extend their industry dominance. BHP is a buy below USD33 on the Australian Securities Exchange or below USD66 on the New York Stock Exchange, while Rio is a buy below USD54.

All right, let’s wash some of the red off. The third-strongest sector in 2014 was accommodation and food services, which grew 8.0%.

By far the single most hospitable company among our Aggressive Holdings, Amalgamated Holdings Ltd. (ASX: AHD) has delivered a total return over the trailing year of nearly 37% in local currency terms and 16% in U.S. dollar terms.

That solid performance masks the somewhat troubling selloff since the beginning of the month, though a portion of that decline can be attributed to the stock trading ex-dividend on March 3.

The stock started declining in the absence of any company-specific news about 10 days after reporting a strong fiscal first half. There have been no major insider transactions reported during this time period, analyst sentiment has remained static, and short interest is negligible.

Prior to the selloff, the stock was within shouting distance of analysts’ consensus 12-month target price, so perhaps some investors saw the stock as fully valued and decided to take profits. Amalgamated Holdings is a buy below USD10.


DIVIDEND WATCH LIST

House of Cardno

Aggressive Holding Cardno Ltd. (ASX: CDD, OTC: COLDF) has been in a deep hole since management announced a downward revision to fiscal 2015 first-half guidance in late November.

From AUD5.04 on Nov. 19, 2014, the stock dove to AUD2.88 by Dec. 2. 

Cardno sold off again in early January after CEO Michael Renshaw “resigned” in a “joint” decision with the board and was replaced by CFO Graham Yerbury on an interim basis. The stock plumbed depths it hadn’t seen since the Global Financial Crisis.

The price has stabilized above AUD3, as management announced half-year results that came in at the top end of November guidance.

Fee revenue was up 7.8%, but earnings before interest, taxation, depreciation and amortization (EBITDA) were off 15.2%. And net profit after tax (NPAT) declined by 27%. The interim dividend was down 31.6%.

Management also noted persistent challenges, most notably that the conclusion of resource-related projects in Australia haven’t been matched by an uptick in infrastructure investment.

And a recovery for its U.S. business is evident but is unfolding slower than expected.

As such, management has tapped the brakes on Cardno’s mergers-and-acquisitions-driven growth strategy until underlying operating conditions improve.

On a positive note, project backlog was up 40.9% to AUD1.014 billion as of Dec. 31, 2014, with particular strength in the Americas and a return to growth in Australia and New Zealand.

Cardno remains a hold.