The bulls argue the latest rout in global share markets is a buying opportunity: that China’s decision to devalue its currency is positive in the medium term; that the US economic recovery is proceeding; and that Australia’s economy is slowly improving.

The bears say the yuan’s devaluation and the Shanghai Composite Index’s sharp falls suggest China’s economy is much weaker than realised. And, worse, that China will export its problems to emerging economies, further hurt commodity markets, spark a capital exodus from developing nations, and eventually engulf the global economy. It’s cheery stuff.

I favour a milder version of the bear argument in the first half of 2016 and a milder version of the bull argument into the second half and beyond. For investors, that means watching and waiting for better value over the next six months, having cash to deploy, and focusing on companies with strong economic moats (sustainable competitive advantages) and reliable dividend yield, preferably fully franked.

This is no time to dive into the market and aggressively buy cyclical growth stocks, even though sectors such as resources are starting to look cheap. The turning point for resource shares, particularly energy companies, is closer. But we’re not there yet because more time is needed for the commodity supply-demand equilibrium to get back into balance, as minerals and energy supply adjusts and demand stabilises.

Nor is this the time to try to time the market and second-guess what might happen. Although claims that the world is on the brink of the next global financial crisis are overstated, there is cause for concern: the decline in global trade is a portent to a slowing global economy in 2016. The question is whether tumbling equity valuations have sufficiently adjusted to the deterioration.

In the medium term (3 years-plus), I am still a great believer in the emergence of a larger Asian middle class, the need to spend trillions on Asian infrastructure to supply and store food, and the efficiency gains from automation, robotics and machine-to-machine learning that could have a more profound effect on corporate earnings than many realise. I remain optimistic on China’s potential to transition to a consumer-led economy this decade.

Taken together, long-term portfolio investors should use the next six months to add to portfolios, but slowly and cautiously. The market will be characterised by powerful short-covering rallies, possibly in the next few weeks given the speed and magnitude of falls, and equally intense bouts of selling on the slightest bad news from China. There is no need to rush in and buy just yet.

With the ASX 200 at 4970 points as I write, now looks a reasonable time to buy a small group of stocks, provided investors can withstand short-term market volatility. We’ll know more next few weeks if the market can hold that important index level around 4900 from a technical-analysis perspective, or if a new leg of the sell off in Australian equities and our currency is unfolding.

Whatever happens, cautiously accumulate stocks on the big market dips, stick to the highest-quality companies with defensible earnings, and pay even more attention to stocks with reliable franked yield.

Yield has rarely been more important. With diminished prospects for capital growth in the next six months, portfolio investors will again find most of their total return is from yield. Also, China’s decision to devalue the yuan will force the US Federal Reserve to delay the timing and speed of future interest-rate rises. The Reserve Bank of Australia, too, will be forced to keep rates lower for longer or cut them again in the first half.

Investors will favour equities with reasonably higher yield than cash deposits, given persistent record-low interest rates. The premium from equity yield over the cash rate will expand. Defensive yield will also limit share-price losses as investors return to blue-chip shares when the yield becomes more attractive, provided they believe forecast earnings can be maintained.

The key is companies with reliable yield. At $15.45, BHP Billiton has a trailing yield of almost 15% after franking, seemingly too good to be true. It is. The market is perhaps signalling that BHP will not be able to maintain its dividend policy as commodity prices fall further.

Here are five companies that fit the bill for defensive yield in this market:

1. Commonwealth Bank

The king of income stocks has tumbled from a 52-week high of $96.17 to $78.33, amid deteriorating sentiment towards the banks. Higher capital requirements, fear of slower credit growth, falling house prices and rise in bad debts have crunched share prices. Value is returning to the big four banks. None are screaming buys, but recent share price falls have made them worthy of accumulation, particularly given their attractive fully franked dividends and ability to maintain them. Claims that the housing market is about to tank – and ensuing spike in bad debts and deterioration in bank earnings – are overstated, given the persistence of record-low interest rates. Flat or slightly positive house-price gains are likelier.

Commonwealth Bank (CBA) remains the pick of the banks, given its technology advantage over rivals, superior brand and capital position. At $78.33, it trades on a grossed-up forecast dividend yield, after full franking, of 8.2% in 2016-17, consensus analyst estimates show. The forecast Price Earnings (PE) multiple is a reasonable 13.3 times.

CBA

Source: Yahoo!7 Finance

2. Telstra Corporation

The market’s other great yield stock has fallen from a 52-week high of $6.74 to $5.30 amid the global sell off. A one-year total shareholder return (including dividends) of negative 14% is unfamiliar territory for Telstra investors after several years of strong gains.

At $5.30, Telstra has a forecast grossed-up dividend yield of about 8% in 2016-17, consensus analyst estimates suggest. Telstra reiterated in late October its guidance for mid-single-digit revenue growth and low single-digit growth in Earnings Before Interest, Tax, Depreciation and Amortisation – an outlook well flagged to the market.

Rising competition in mobile and fixed broadband is a headwind, but Telstra’s economic moat – a superior mobile network and the scale derived from its market share and infrastructure – provide comfort. More than half of analysts who cover Telstra have a hold recommendation, and a median share-price target of $5.71 suggests modest capital growth from the current price. That’s okay in a volatile market, provided Telstra slowly lifts its dividend per share.

TLS

Source: Yahoo!7 Finance

3. Sydney Airport

The airport operator’s 10% fall from its 52-week high of $6.69 looks almost tame compared with larger falls in the big-four banks and Telstra. Sydney Airport’s wide economic moat, thanks to its monopoly asset, provides a haven in a sluggish economy.

The market has continually underestimated Sydney Airport’s (SYD) earnings potential and its leverage to stronger inbound tourism growth from China. Several analysts over the years have argued it has too much debt, is overcomplicated and overvalued.

Sydney Airport’s average annualised total shareholder return of 22% over five years has defied the sceptics. Its traffic performance for November 2015, up 4.7%, beat market expectation and underscored its leverage to Asian tourism.

Sydney Airport’s forecast 4.2% yield, unfranked, is solid rather than spectacular for yield investors, although there is potential dividend upside as passenger traffic grows. Against that, lower economic growth in emerging markets and a lower yuan could constrain Chinese tourism, but few blue-chips in 2016 have such strong tailwinds in their market. The challenge is buying Sydney Airport when better value briefly emerges.

SYD

Source: Yahoo!7 Finance

4. Sonic Healthcare

The pathology and radiology provider has had a challenging 12 months, falling from a 52-week high of $23.73 to $17.21. The market sell off and lower earnings guidance for 2016-17, due to healthcare fund cuts targeting pathology, diagnostic imaging and radiology, weighed on its price.

Sonic (SHL) said in December that the Federal Government’s Mid-Year Economic and Fiscal Outlook, with its unexpected announcement of Medicare fee cuts, would lead to small single-digit declines in revenue and underlying earnings, if passed in the Senate.

Investors have over-reacted to the potential change and selling has been amplified in the market sell off. Sonic’s Australia, United States and United Kingdom divisions are performing solidly, although the imaging business (a smaller proportion of revenue) was trading below expectation, in part because of regulatory uncertainty.

Seven of 14 broking firms that cover Sonic have a buy recommendation, five a hold and two a sell, consensus estimates show. A median share-price target of $19.76 suggests Sonic is undervalued at the current price.

Morningstar’s fair value for Sonic is $22 a share ($21 if the Medicare cuts take effect) and Macquarie Equities Research valued it at $24 a share in mid-November. Sonic’s grossed-up dividend yield of almost 6% in FY17 should start to attract income investors wanting exposure to a dominant medical diagnostics provider that is leveraged to an ageing population and has good long-term growth prospects offshore.

SHL

Source: Yahoo!7 Finance

5. Westfield Corporation

Retailers and shopping-centre owners would be among the last stocks to own if global economic growth slows and another financial crisis strikes.

Westfield Corporation (WDC), analysed in this column for the Super Switzer Report in early December, looks interesting after falling from a 52-week high of $10.66 to $9.19 – provided it holds technical support on its chart at $9.

Westfield’s main attractions are its exposure to the US economy, which still has better prospects than most developed economies, and potential for significant rental increases when some leases are reviewed from 2017. Asset-valuation revisions and potentially a lower Australian currency in 2016 are other potential tailwinds.

At $9.19, Westfield’s expected yield in 2016 is just below 4%, unfranked, consensus estimates show – a touch low for income investors. However, it arguably has better growth prospects than most ASX 20 stocks, provided the US economic recovery continues, which seems likelier as US interest rates remain low for longer than expected.

WFD

Source: Yahoo!7 Finance

– Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at January 12, 2016.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.