This week we’re enduring another global market selloff triggered by weakness in China. How low will China’s economy and stock market sink? It’s a puzzle compounded by the country’s murky financial disclosure policies and dubious financial oversight.

But what we do know, with perfect clarity, is that when growth is tepid in developed economies and not that much better in emerging markets, you need a broad selection of investments in businesses with pricing power, and in businesses that are also underpinned by strong demographic trends.

Longtime subscribers to Global Income Edge know this is one of our main investment strategies, but I think it bears repeating given the current volatility.

Since the stock market rout last August, we have been predicting increased market turbulence. And in our October issue we discussed what could happen in 2016 and what investments would benefit.

The scenarios we prepared for have been playing out. The Federal Reserve raised rates, commodity prices have stayed low (in fact, oil prices and commodities have collapsed) and Europe is improving (domestic demand and growth has been on the rise).

What We Like

We believe U.S. domestic firms still offer great value, though we generally shun most U.S. multinationals given the strengthening dollar is making exports less competitive. And we’re still in favor of U.K. multinationals, which are highly diversified across the world.

But given the depreciation in the Euro, which makes exports there more competitive, as well as European central bank stimulus that has “no limits,” we continue to see the Continent as the top place to be in 2016. Particularly as many investments are still undervalued.   

We have long held various European financials and health care, though we would advise investors to be discerning, as not all European financials and healthcare companies are created equal.

For subscribers, in the upcoming January issue of Global Income Edge, we review the best income prospects in Europe and around the world to give investors that extra diversification and hopefully peace of mind.  

So when China’s markets collapse or the Dow Jones Industrials fall hundreds of points again, we’d like you to be confident that your Global Income Edge portfolio is making money. 

Portfolio Update 

Global Income Edge’s Conservative Portfolio held the line during the market rout this week. The portfolio is up almost 2% on a total return basis, whereas the S&P 500 Total Return Index was down 1.28%. The Conservative Portfolio was designed to weather severe market volatility such we’ve seen the last few days.

Our Aggressive Portfolio underperformed, as it was designed to outperform as global growth returns. With China’s latest slowdown, global growth increasingly looks doubtful. In the next few weeks, we’ll be adding new portfolio names that are aggressive investments but rely less on global growth.   

Our REIT Portfolio, after a few months of being underwater due to an overreaction in response to impending Fed rate increases, is now in the black. It appears weak growth and a modest rate increase by the Fed in December has convinced income investors that REIT yields will be more competitive than Treasuries for some time.  

Asia and the Market Reaction

While we have largely sold or put on hold investments that have exposure to Asia before last August’s collapse, the continued weakness in Asia has forced us to reexamine institutions that have even a tangential exposure to Asia.

The volatility in markets has also forced us to sideline some of our other holdings until the market overreaction subsides, as the slowdown in China is not really new news.      

Aggressive holding HSBC (NYSE: HSBC) and Westpac Banking (NYSE: WBK) have varying degrees of exposure to Asia and China proper. 

HSBC, which has the most exposure to mainland China and Asia, posted quarterly profits before tax 32% higher than the third quarter of 2014. This is even as Asia was hurt by falling stock markets and slowing economic growth.

HSBC is a well-diversified bank, with almost half of its revenues coming from Europe and North America, where growth is expected to continue, but its Asia business comprises almost 40%.

There has been concern that with the renewed weakness in China and Asia could affect the company’s earnings due to increased losses on loans in the region.

While the firm has weathered other crises in Asia, and has been one of the region’s most conservative banks in the past, we believe investors are better served to stop accumulating HSBC until we can determine how well the bank has weathered the latest stock market rout in China. HSBC is a Hold.  

Similarly, one of Australia’s big four banks, Westpac Banking, has done a remarkable job of weathering the commodity collapse over the last few years and still remaining profitable.

And the bank is well capitalized already with its tier-1 ratio at 8.8%. A common measure of bank strength based on its equity capital and reserves, the ratio is well above Australian regulators’ minimum level.

We had been excited about Westpac’s expansion plans in Asia, and the Trans Pacific Partnership should give the bank access to more markets. But as with HSBC, we advise investors to stop accumulating until we can assess the impact on the bank from the further growth slowdown in China and in the region. WBK is a Hold.

Also, we’ve noticed weakness in one of our REIT holdings, Hospitality Properties Trust (NYSE: HPT), which we attribute to panic selling as a result of the China slowdown and concerns about growth businesses such as hospitality.  In the last six months the stock is down from about $30 a share to about $24 this week.

HPT owns hotels and travel centers throughout the United States, Ontario, Canada and Puerto Rico. It has two types of real estate investments: hotels and travel centers, which we believe will benefit as disposable income increases with increased employment and business activity. 

We believe the U.S. economy will continue to grow and believe growth in travel will continue its upward tick as low oil prices makes air travel cheaper and puts more disposable income in consumer’s hands.  And the company’s financials remain strong.

However, we advise investors stop accumulating until cooler heads prevail. HPT is a Hold