Seismic shifts in U.S. policy, from trade to fiscal, have led to market volatility in the first half of 2025. As there remains considerable uncertainty regarding where these policies will settle and their consequent impact on the global economy, market volatility is unlikely to dissipate in the near term, demanding the construction of resilient portfolios to navigate the current environment.

Income generation will be crucial for resilience. Stable and predictable income streams may help portfolios from downside risks during volatile periods while maintaining market exposure. There are various ways to tap into income generation.

Fixed income is a widely accessible asset class for adding income and diversification. Historically, periods of high policy uncertainty have come with low or even negative stock-bond correlations, and it is no different this time with the 6-month correlation below -0.2. This means complementing risk assets with bonds is working again, and the current level of uncertainty stresses the need for diversification.

Equities could also be tailored to generate income opportunities. Inclusion of high dividend equities can reposition portfolios along the equity return component spectrum, with high dividend index contributing to 17% of total return more than the broad index in Asian markets over the past 25 years, and 23% in developed markets. Portfolios can thereby receive dividend yields while retaining market exposure. Companies with robust free cash flow and dividend growth can provide more reliable payouts amidst an uncertain economy, providing better risk-adjusted returns.

Moreover, a covered call strategy can serve as a portfolio overlay to generate additional income opportunities. With economic concerns weighing on the potential for further valuation rerating in equity markets, investors can sell partial upside on underlying investments to collect option premiums as income, effectively monetizing market volatility. While this approach limits upside potential, the additional income stream can help offset declines in a down market.

“Alternatively,” portfolios could consider income generation beyond traditional markets. Real assets, such as infrastructure, real estate and transportation, have traditionally delivered uncorrelated returns, offering predictable yields while reducing overall portfolio volatility. They also act as an inflation hedge through stronger cost pass-through, if global inflation re-emerges.

Amid policy and economy uncertainties, the case for elevated volatility in the short to medium term is building. This presents an opportune moment to integrate income-oriented asset classes into portfolios. Fixed income, high dividend equities, option overlays and real assets can collectively enhance portfolio defense against future market shocks.

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