How to get better income in Asia

Many investors look for income from investments, but does it matter where and how that income is generated?

We believe that Asia has unique features that helps it provide investors with quality and sustainable income. Compared to the rest of the world, Asia Pacific ex Japan has the highest number of companies (>400) with dividend yields above 3%, reflecting a strong management culture that focuses on shareholder returns. Asia’s high dividend paying companies are found in both stable as well as high-growth sectors, potentially offering investors income and growth. At the same time, government -led initiatives to improve corporate governance and shareholder returns are rising in Asia. As for Asia’s bond markets, they still offer investors attractive all-in yields. The structural rise in domestic investor participation in some of Asia’s high yielding bond markets such as Indonesia and India have also helped to lower market volatility.

Fig. 1. Asia corporates beat on cash flow metrics

Source: Bloomberg, Eastspring Investments as at 31 December 2024, The use of indices as proxies for the past performance of any asset class/sector is limited. Past performance is not necessarily indicative of the future or likely performance.

Asian economies are also underpinned by a diverse and evolving set of growth engines. Earnings revisions are improving across the region and domestic consumption appears to be recovering in India. Meanwhile Taiwan, South Korea and China are benefiting from their leadership in advanced technology while ASEAN’s prospects are supported by its manufacturing capabilities and tech-adjacent growth.

As active managers tap on Asia’s income edge, there are innovative strategies that can help to boost income, but it is important that they do not compromise on risk.

Christina: Our approach is a blend of longer‑term positioning and selective, tactical opportunities. At the core, we maintain longer‑term holdings in income‑generating stocks, where we focus on fundamentals such as business quality, balance‑sheet strength, and cash flow sustainability. Alongside this, we layer on tactical strategies. This can include dividend capture opportunities, where we position around dividend ex‑dates, as well as selectively positioning ahead of sizeable special dividends when we believe the market has not fully priced them in. We also make use of covered calls - writing single‑stock options over existing holdings to generate additional income.

Rong Ren: We are focused on enhancing income through strategies that are repeatable and uncorrelated. One area is option underwriting, where we sell short‑dated, out‑of‑the‑money foreign currency (FX) options to harvest the gap between implied and realised volatility in selected FX pairs. Asian currency regimes tend to exhibit managed volatility and we aim to harvest volatility premia without taking meaningful directional FX risk.

We also seek to take advantage of cross‑currency basis opportunities. When funding dislocations appear, swapping between USD and local currencies can add incremental carry. That said, we only act when the uplift clearly exceeds liquidity and transaction costs.

Christina: Risk management is central, particularly when combining longer‑term positions with more tactical strategies. We are laser‑focused on potential catalysts across our holdings, and that becomes even more important when strategies are shorter‑dated or more tactical. For example, timing is key when using covered calls. Writing options ahead of known events such as earnings announcements can create unintended outcomes, where the option moves in‑the‑money and the costs offsets the premium earned.

By comparison, dividend capture and positioning around special dividends tend to align more closely with our core fundamental skill set. While these strategies are generally less exposed to the risks associated with options, we remain on the look-out for potential catalysts which can cause outsized portfolio downside.

Rong Ren: Agree with Christina that risk management is front and centre when we manage portfolios. In option underwriting, we keep tenors short to limit gap and gamma risk, stay strictly in out‑of‑the‑money strikes, and cap deltas and notionals. This is to ensure that any potential losses are limited. We also avoid executing near major macro events and regularly run stress tests to validate portfolio resilience.

For cross‑currency basis trades, we only take advantage of such trades when the currency moves are driven by technical funding flows. We prefer liquid short‑to‑medium tenors, and size positions accordingly to avoid excessive portfolio volatility. Having clear pre-set exit triggers is important. At the same time, aligning with liquidity needs help ensure basis carry stays incremental rather than directional.

Christiana: I believe that there is no “good” or “bad” income, only poorly understood income. If you buy a high dividend stock for the long term but fail to discern that the high dividend yield is a one-off and the stock collapses in the next quarter, then you have misunderstood the stock and have taken on outsized capital risk, despite generating some income in the short term. If, however, you have identified that the same stock is high dividend yielding because of a special situation and you capture this tactically over the short term, and size the position accordingly, then you would have generated income while managing capital risk more effectively.

Rong Ren: For me, good income tends to be transparent, often coming from well‑understood structural premia such as volatility or basis premia. It is typically generated using plain‑vanilla instruments, with clearly defined exposures, and limited tail risks. Good income should also be repeatable and scalable.

By contrast, bad income often looks attractive on the surface but is exposed to deep tail risk, excessive leverage, or have path-dependent, opaque structures. Bad income tends to have liquidity risks, making the trade potentially difficult to exit during periods of market stress, or hinges on a single macro outcome being right.

Christina: Be vigilant and discerning. Getting drawn in by a high headline yield can be dangerous if the yield is not sustainable. Invest with managers that have both your capital and income in mind.

Rong Ren: Understand where the extra income is coming from and what the worst‑case outcomes could look like. For institutional investors, any income‑enhancement strategy should sit comfortably within the portfolio’s risk budget and liquidity profile, particularly during periods of stress. These strategies should support overall portfolio resilience, rather than introduce new vulnerabilities.