A good friend and former colleague, who used to cover emerging Asian markets and other growth engines around the world, used to habitually ask me and others around our office, in an entertaining fashion made so by his inimitably Greek style, “Are you ‘bull’ or ‘bear’?”

My response, conditioned after a while but nevertheless grounded in gut, was typically, “Neither. I’m just following the numbers.”

And based on recent earnings and economic numbers we continue to see a global economy that’s experiencing a jagged an ultimately unsatisfying recovery from the worst downturn since the 1930s.

For every bright spot there is at least one point of darkness. For every step forward there is at least one step back. For every positive data point there is at least one “but.” That’s the way it’s been since before the Sept. 26, 2011, debut of Australian Edge, and that’s the way it appears it’s going to be for the immediate future.

Our antidote is to focus on high-quality businesses durable enough to withstand ups and downs in the macro picture and to grow dividends over the long term.

Figures released by the National Bureau of Statistics last week show that China grew by 7.4 percent in the third quarter, slowing from 7.6 percent in the second quarter. The third-quarter 2012 rate is the slowest pace of Chinese gross domestic product (GDP) growth since the first quarter of 2009.

But it was in line with expectations. And on a quarter-over-quarter annualized basis–the way it’s measured in the US and Europe–growth actually accelerated to 9.1 percent in the third quarter from 8.2 percent in the second.

Other statistics suggest the Chinese economy is stabilizing and even showing signs of at least beginning its inevitable transition from investment-led to consumer-led growth. Retail sales rose 14.2 percent year over year, the best showing since March 2012 and better than a 13.2 percent consensus forecast.

A two-and-a-half-year effort by Chinese leaders to arrest the country’s real estate market seems to be succeeding, as an analysis of average home prices in 70 cities by the Wall Street Journal blog China Real Time Report revealed a 1.2 percent year-over-year decline in September.

This effort is in fact the primary cause of China’s slowdown. And new residential floor space under construction declined by 28 percent year over year in September, reversing what looked like a resumption of growth in August, when data revealed a 15.6 percent year-over-year increase.

But China Real Time also reports, via a Credit Suisse Group AG (Switzerland: CSGN, NYSE: CS) property analyst, “that monthly data is volatile” and “that the downturn in the numbers was at odds with what their research team had been hearing on the ground.”

According to Credit Suisse note to clients, “A very large national construction company chief executive told us in September that he saw housing new starts accelerating, especially in the South China region.

The National Bureau of Statistics also reported that during the first three quarters of 2012 per-capita disposable income of urban households grew by 13 percent, which along with the effects of policymakers’ successful attempts to rein in housing affordability problems are being solved.

Value-added industrial production was up 9.2 percent in September from a year earlier, accelerating from an 8.9 percent increase in August and beating a consensus expectation for a 9 percent rise.

Fixed-asset investment in non-rural areas–a closely watched indicator of construction activity and demand for machine equipment–was up 20.5 percent in the first nine months compared with the same period a year earlier. That was up from 20.2 percent in the first eight months of the year and also beat a consensus forecast of 20.2 percent rise.

It’s been pretty dark data for some months now out of China, now the world’s second-largest economy and its most-watched growth engine. But consumption is clearly rising, and construction and industrial activity appear to be at least establishing a foundation for new growth.

This week we learned that the HSBC Flash China Manufacturing Purchasing Managers Index (PMI) rose to a three-month high of 49.1 in October and also notched the best order book number since April, a sign too that if not necessarily strengthening the economy in the Middle Kingdom is at least stabilizing.

But (there’s that word again) it has to be noted that any PMI reading below 50 indicates “contraction.”

From the HSBC release, which is headlined, appropriately, Output Falls at Slower Pace in October:

“October’s flash PMI reading continues to recover for the second month, thanks in part to a gradual improvement in the new orders index which picked up to a six-month high (albeit marginally below 50). This is helped by the filtering-through of the earlier easing measures. However, external challenges are still abound and the pressures on job market are lingering. This calls for a continuation of policy easing in the coming months to secure a firmer growth recovery,” writes Hongbin Qu, HSBC Chief Economist of China, about the private survey.

Bottom line: “The growth has likely bottomed out and is headed for a gradual recovery into 4Q. With inflation still under control and downside risks to growth lingering, China should continue with its current easing efforts to secure a firmer growth recovery,” the economists writes.

The Australian dollar bounced on the news and appears to be headed for a weekly close near its five-day high. The aussie was at USD1.0349 as of this writing, up from USD1.0331 last Friday and an intraweek closing low of AUD1.0265.

A pickup in Chinese activity would be an unquestioned positive for Australia, for which the Middle Kingdom accounts for about a quarter of total trade.

Positive as well for the global economy are the brightening economic numbers out of the US. Unemployment is below 8 percent and weekly initial jobless claims continue to trend lower. This bodes well for the US consumer, which would be the one you’d identify if you were going to reduce the matter to a single factor.

The US Dept of Commerce, in its initial report of three on the topic, reported Friday morning that gross domestic product (GDP) expanded by 2.0 percent in the third quarter, beating the consensus expectation of 1.8 percent and improving on the 1.3 percent second-quarter increase.

Nominal GDP was up by 4.8 percent, well above the estimate of 3.9 percent, the second-biggest gain since the third quarter of 2008 and better than a forecast of 2.1 percent.

Personal spending was up by 2 percent, slightly lower than expected. Gross private investment was up by 0.5 percent, below the gain seen in the second quarter, as spending on equipment and software was flat after solid gains in previous quarters. Residential construction picked up some of that slack with 14.4 percent growth. Trade was a modest drag, as exports fell 1.6 percent, while imports were lower by just 0.2 percent.

Federal government spending was up by 3.7 percent on a 13 percent gain in defense spending. Spending at the state and local level fell by a 0.1 percent. Inventories were a small drag, as they rose less than in the second quarter. Real final sales, excluding inventories, rose by 2.1 percent, up from 1.7 percent in the second quarter and compared to 2.4 percent in the first.

The average GDP growth rate for the past three years is 2.1 percent; the economy grew by 2.4 percent in 2010 and 1.8 percent in 2011 and is averaging 1.8 percent thus far in 2012. So we’re still not where we need to be to support new entrants to the workforce and to instill lasting confidence in a global recovery.

It’s also somewhat disconcerting that major growth drivers such as housing were clearly goosed by the US Federal Reserve’s extraordinarily loose monetary policy and that federal spending also accounted for a rather large part of the outperformance.

US consumption is good for China, however, and what’s good for the Middle Kingdom is good for the Land Down Under.

We’re a long way from a self-sustaining, satisfying recovery. But it seems to be getting at least a little better at least a little bit of the time.

The Roundup

The downbeat earnings season in North America–there are exceptions, namely essential-service companies such as Verizon Communications Inc (NYSE: VZ), AT&T Corp (NYSE: ATT) and Dominion Resources Inc (NYSE: DOM) as well as a good number of Canadian companies from a cross section of industries–could signal the onset of a retrenchment or at least a shuffling of institutional portfolios that could lead to a decent-size correction for global equities.

With this in mind, I’d like to reiterate advice we’ve provided in the last couple Portfolio Updates in your regular issues of Australian Edge: Book partial profits on AE Portfolio Holdings that have generated outsized returns since our original recommendation or that have provided significant gains for you since you established your positions.

Based on what are now ongoing takeover discussions with Archer-Daniels-Midland Company (NYSE: ADM) using the US agribusiness giant’s AUD11.75 per share offer from Oct. XX as a starting point for talks, we’ve made Aggressive Holding GrainCorp Ltd (ASX: GNC, OTC: GRCLF) a hold.

GrainCorp closed this week at AUD12.20 per share, up from AUD8.85 on Oct. 18 on the Australian Securities Exchange (ASX). Shares were halted Friday as GrainCorp sorted out the matter of two large block trades and prepared a response to what was eventually revealed to be an official offer from ADM. The stock bounced immediately at the open on Monday, trading at a small but noticeable premium to the offer price all week.

As of Friday’s close on the ASX, GrainCorp has generated a total return in US dollar terms since our original Sept. 26, 2011, recommendation of 106.49 percent. It’s time to book at least part of that gain. Aggressive investors can let some portion of their original position run in reasonable anticipation of a higher bid for the company. Based on the week’s events, however, GrainCorp is a hold.

Conservative Holding CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY), which manufactures and distributes biotherapeutic products, is also ripe for profit-taking at these levels. The stock has generated a US-dollar total return of 57.23 percent from Oct. 14, 2011, through Oct. 26, 2012.

CSL was one of the first stocks we added to the Portfolio to join our original “Eight Income Wonders from Down Under.” The stock closed at AUD46.30 on the ASX today, approximately USD48. That’s about 37 percent above our buy-under target of USD35.

The stock is effectively a hold; if you own it and are sitting on a gain similar to the one for our holding period, consider booking a partial profit.

Other Conservative Holdings that currently boast US-dollar total returns in excess of 50 percent for our holding period (the date of our initial recommendation and inclusion of the stock in our Portfolio through the close of trading on the ASX on Oct. 26, 2012) and that are also trading above our buy-under target include Cardno Ltd (ASX: CDD, OTC: COLDF) at 61.24 percent; Envestra Ltd (ASX: ENV, OTC: EVSRF) at 56.62 percent; and Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY) at 54.80 percent.

Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) is also a big winner, with a total return in US dollar terms of 52.95 percent from Sept. 26, 2011, through the close of trading Down Under on Friday.

The stock actually sold off a bit toward the latter part of this week, closing at AUD25.71 on Tuesday before dipping just ahead and just after management’s report on full-year fiscal 2012 results Thursday morning in Sydney. ANZ closed at AUD25.23 Down Under, or USD26.13 as of this writing. Our buy-under target remains USD25, so it’s almost 9 percent above our high-end entry point.

ANZ posted a statutory net profit after tax (NPAT) of AUD5.7 billion and underlying profit of AUD6.0 billion for the fiscal year ended Sept. 30, 2012. Both figures were up 6 percent over fiscal 2011. ANZ’s now five-year quest to become a “super-regional” bank continued to progress, as 21 percent of overall revenue was derived outside its still-core Australia and New Zealand geographic focus.

Though Australia and New Zealand combined retail and commercial operations drove half of overall earnings growth, Global Markets revenue increased 14 percent to AUD1.9 billion, as customer sales grew 10 percent to account for 61 percent of total income, and Greater China is now ANZ’s third-largest market in terms of earnings.

Deposits grew 12 percent, with lending up 8 percent adjusted for currency fluctuations. ANZ continues to have the lowest wholesale funding requirement among Australia’s “Four Pillars,” as customer funding comprises 61 percent of total funding.

The Australia division posted 4 percent profit growth, boosted by a strong second half. Productivity gains, retail market share gains and growth in commercial customers highlighted segment performance. New Zealand profit surged 11 percent, while International & Institutional profit was up 3 percent.

Segments linked directly to ANZ’s “super-regional” strategy, including Transaction Banking, Trade and Supply Chain and Global Markets were “all well up,” according to CEO Mike Smith, who instituted the strategic growth plan when he took the reins five years ago.

Global Wealth profit was flat, though second-half results improved over the first half on better insurance results, higher investment income and productivity improvements.

ANZ set aside AUD1.25 billion for bad-loan provisions, in line with expectations and broadly in line with figures for fiscal 2011. Mr. Smith did warn that, along with a rather cautious outlook for fiscal 2013 based on slowing domestic and global growth, provisions would probably be higher.

Gross impaired assets were lower year over year and half over half. New impaired assets declined half over half, with impaired loans 13 percent lower. All divisions saw half-over-half decreases in new impaired assets with the exception of Australia, with increases predominantly in regional agribusiness.

In his commentary during the bank’s earnings conference call Mr. Smith noted, “There’s no question the global economy is softening.” He did, however, express his “growing confidence” that European policymakers “will avoid the Armageddon scenario,” though “ripple effects of a chronically weak Europe are becoming more and more apparent.”

Mr. Smith also said he was “optimistic” about the US but noted that decisions about fiscal policy in the coming months will have “a large impact” on global growth in 2013.

As for China, Mr. Smith described its present condition as a “managed slowdown.” ANZ expects China to post 7 percent to 8 percent growth in 2013. “China and India are the growth engines of Asia,” said Mr. Smith, “and Asia still remains the best performing region in the world economy.”

ANZ forecasts 2.7 percent growth for Australia in 2013, 2.5 percent for New Zealand.

ANZ continues to invest in its “super-regional” aims, but an increased focus on productivity has at the same time allowed it to cut its cost-to-income ratio 110 basis points to 45.1 percent. The bank targets a further 2 percentage point reduction in its cost-to-income ratio by the end of fiscal 2014.

Lower-cost growth is a key metric in an environment where official interest rates are likely to come down and the competition for deposits continues to be hot. Net interest margin declined by 12 basis points, on an ex-Global Markets basis the decline narrowed to 3 basis points from the end of the first half. Compressed margins reflect increased funding costs, in particular from deposits, as well as asset pricing pressure in the bank’s Institutional segment.

ANZ is “well positioned” for the implementation of new Basel III capital requirements as of Jan. 1, 2013. As of Sept. 30, 2012, ANZ’s Common Equity Tier 1 ratio (CET1) was 10.0 percent on a Basel III harmonized basis, or 8.0 percent under the Australian Prudential Regulation Authority’s (APRA) Basel III standards.

Management confirmed a final dividend of AUD0.79 per share, up 3.94 percent year over year, to be paid Dec. 19, 2012, to shareholders of record as of Nov. 14, 2012. Shares will trade ex-dividend on the ASX as of Nov. 8. That brings the full-year dividend to AUD1.45 per share, up 3.57 percent from AUD1.40 for fiscal 2011.

Australia & New Zealand Banking Group remains a buy on dips to USD24 on the ASX using the symbol ANZ or on the US over-the-counter (OTC) market using the symbol ANEWF.

ANZ also trades as an American Depositary Receipt (ADR) on the US OTC market. ANZ’s ADR, which trades under the symbol ANZBY, represents one ASX-listed share (and all the rights and benefits attendant thereto) and is also a buy under USD24.

We remain confident in the long-term ability of all these companies–including GrainCorp, should an acquisition deal with ADM or any other potential suitor not be consummated–to generate wealth for investors through dividends and capital appreciation.

Each is underpinned by a solid business with capable management, and each will benefit, directly or indirectly, from Australia’s key position as a developed economy with Western-style institutions in the still rapidly growing and evolving Asia-Pacific region.

And we do want to let these winners run. But we also caution against allowing any one stock or subset of stocks to take up too much of your portfolio, and we want to protect gains in this crazy period for global markets.

In less-than-stellar news, AE Portfolio Conservative Holding SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF) suffered a steep selloff Tuesday in Sydney after management announced what was disappointing guidance for fiscal 2013 first-half revenue and profit at the company’s annual general meeting on Monday.

SMS closed at AUD4.95 on Oct. 23, down 23.37 percent from its AUD6.46 close on Oct. 22. The selling continued Wednesday, as SMS closed at AUD4.74. As of Friday the market had recognized some of this as an overreaction and had bid the shares back up as high as AUD5.04 before they settled at AUD4.94.

Based on financial performance to date and contracts signed in the first quarter, SMS management estimates that fiscal 2012 first-half NPAT will be in the range of AUD12.5 million to AUD14 million. NPAT for the first half of 2011 was AUD15.2 million.

SMS signed AUD392 million of new contracts during fiscal 2012, up 12 percent from the previous year. But this growth slowed in the fourth quarter, and this slowing trend has persisted in the first quarter of fiscal 2013. New contracts signed in the current fiscal year total AUD81 million as of Oct. 23, below the prior corresponding period.

Management attributed the shortfall to lower demand from a major Hong Kong based client due to it experiencing poor trading conditions, noting that this decline “has had a significant impact on the company’s first quarter financial performance and will continue to do so for the remainder of the first half.”

SMS has mitigated potential damage by inking deals with three new strategic clients in Hong Kong, a global insurance and wealth management company, a regional bank and a regional telecom. These deals, however, will take time to make a full contribution to the top and bottom lines.

A major Australian resources company has also deferred a multi-billion dollar project due to depressed commodity prices. Management also flagged weaker demand from the information and communications technology and federal government sectors of its market, which were points of concern at the time SMS reported fiscal 2012 results in August.

SMS has cut costs and reduced head count to better align with client demand now and going forward and has curtailed its recruitment efforts as well. Management also continues “to actively review and reduce overhead costs.”

Management reiterated its policy to pay dividends amounting to 65 percent to 70 percent of NPAT. SMS is paying a final dividend in respect of fiscal 2012 of AUD0.17 per share today, Oct. 26, which brings the final tote for the year to AUD0.305 per share.

SMS’ has zero debt and AUD30 million in cash on hand.

During its annual general meeting presentation management stressed that although it’s taking steps to “protect the profitability of the business in the short term” it’s also “positioning the business to take advantage of any increase in demand in the second half of the financial year.”

Management also highlighted the potential for the long-term contribution from its recently established Asian operations and expressed confidence in “an upswing in customer activity over the coming months.”

During its presentation of fiscal 2012 results to analysts and investors management noted that earnings before interest, taxation, depreciation and amortization (EBITDA) and earnings per share have grown every year over the past seven but one, during fiscal 2009, the height of the Great Financial Crisis. And even during that period SMS maintained its dividend, a sign of its consistency and dependability.

Based on this track record and its recent dividend growth we plan to stick with SMS, which remains a buy under USD6.50.

Conservative Holdings

• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 27 Flash Alert
• APA Group (ASX: APA, OTC: APAJF)–Aug. 24 Down Under Digest
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Jul. 27 Down Under Digest
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Oct. 26 Down Under Digest
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Sept. 11 Down Under Digest
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 27 Flash Alert
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 27 Flash Alert
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Sept. 11 Down Under Digest
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–September Sector Spotlight
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–August Sector Spotlight
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 10 Down Under Digest
• Transurban Group (ASX: TCL, OTC: TRAUF)–Aug. 10 Down Under Digest

Aggressive Holdings

• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 27 Flash Alert
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 23 Down Under Digest (FY 2012 first half, ended Mar. 30, 2012), Nov. 14, 2012 (confirmed, FY 2012, end Sept. 30, 2012)
• Grange Resources Ltd (ASX: GRR, OTC: GRLLF)–Aug. 31 Down Under Digest
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 27 Flash Alert
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Sept. 11 Down Under Digest
• New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Sept. 18 Down Under Digest
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Sept. 11 Down Under Digest
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 27 Flash Alert
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 10 Down Under Digest
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Sept. 11 Down Under Digest