Income looks set to remain a primary focus for investors as we head into 2023. Whether it is to provide for retirement, children’s education, or simply the desire to see a tangible return, many name income as the main outcome they want to achieve when investing.

With interest rates at their highest level in years, we can expect a correspondingly high payout from an income strategy. As such, investors searching for higher income may consider the merits of dividend-paying stocks and bond coupons, especially Asian assets, which have among the highest rates globally.

The Asian income strategy refers to an investment approach that focuses on income generation from assets in the Asian market. Aside from income, Asia-Pacific (excluding Japan) continues to be a dynamic growth region that benefits from strong domestic consumption, as well as manufacturing and export activity that plays into the global demand for high-tech goods and resources.

Asia’s long-term structural growth remains intact, supported by favourable demographics, a growing middle class, and sophisticated manufacturing and technological capabilities. Further, inflation pressures are less pronounced in Asia compared with the West.

South and Southeast Asia are more resilient due to the stable underlying trends in their domestic economies, while North Asia has a strong footing in world trade, which lends itself to continuous innovation.

Following a severe zero-Covid stance in China for more than two years, the recent policy relaxation is a tailwind to Asia’s growth. While there will be some disruption to the economy in the near term from rising infection numbers, this paves the way for a subsequent recovery, most likely in the second half of 2023.

Asian countries that have trade relations with China will naturally benefit from its recovery.

The growth versus income pendulum has swung firmly into the latter camp since 2022, after many years of growth outperformance. The first chart shows investors a very clear picture of the MSCI AC Asia Pacific (excluding Japan) High Dividend Yield Index versus the Growth Index since 2005.

Given the current uncertain global environment, an allocation to Asian companies that pay steady and growing dividends and coupons presents a compelling investment opportunity. (See Chart 1.)

Additionally, the yield on bonds and other fixed income securities in Asia is higher compared with other regions (as seen in the first chart), making it an attractive option for income-seeking investors.

Diversification through an Asian multi-asset income strategy allows one to access a broad range of asset classes, including dividends from equities and coupons from bonds, which is key to lowering risk. In times of market volatility, income strategies also offer better stability while delivering an attractive level of yield. (See Chart 2.)

Alongside global financial markets, Asian equities and bonds had a challenging 2022, affected by a multitude of global issues including rising inflation, interest rates and the Ukraine/Russia war, as well as China’s strict Covid policy and housing woes.

However, the Asian region had also been battered since 2021, with the Chinese authorities’ strict regulation of industries such as after-school tutoring, internet gaming, casinos and real estate, which all fell under the broad banner of “common prosperity”. As may be seen in the other charts, valuations have corrected to attractive levels for both Asian equities and credits, relative to historical averages and developed-market peers. (See Chart 3.)

We expect China’s economy to stage a recovery in 2023 with GDP growth to increase to 5%, from 3% in 2022. The swift removal of Covid curbs should translate into a rebound in economic activities. The service sector in particular should benefit, and this could mean that the economy grows faster than our current forecast.

China’s recovery is a boost not just to the Asian region but to the world as a whole. Nonetheless, proximity and close trade links with the largest economy in the neighbourhood undoubtedly bodes well for all economic activities in the region.

Overall, we believe that many of the concerns from 2022 have now peaked, but we are not out of the woods yet. Lingering concerns remain around interest rates, inflation and geopolitical tensions.

Nonetheless, we are seeing many opportunities within Asia-Pacific. The catalysts for Asian assets to perform well include: (1) the positive moves by Chinese policymakers regarding zero-Covid and property market measures; (2) the less-aggressive inflation regime within Asian countries, which are thus better-placed to end the tightening cycle ahead of developed markets; and (3) attractive financial market valuations relative to history and global peers.

We particularly believe that Asian credits have a large role to play in an Asian income strategy. In addition to diversification benefits, a higher yield provides attractive carry compared with other asset classes. With regard to Asian equities, distressed valuations, improvement in market sentiment and the expectation of China to stage a recovery in 2023 are likely to support this asset class over the medium term.

As always, selectivity remains crucial. We continue to favour segments of the Chinese market that benefit from the easing of Covid restrictions and companies that are closely aligned with the government’s strategic priorities.

We also see opportunities within the financial sector across the region that benefit from higher interest rates and offer attractive valuations and yields. In addition, the defensive profile of Australia, long-term economic growth in India, and global industry leaders in South Korea and Taiwan will have a key role to play in 2023 and the years ahead. Given current conditions, a diversified and risk management approach remains warranted in navigating the recovery ahead. An Asian income strategy that focuses on strong dividend names and high-quality corporates with growth potential will help to deliver a more stable path of returns.