Markets in China have seen volatility for the past three years due to global economics as well as government policy moves. Lazard Asset Management believes China equity investing requires an active approach by targeting specific companies with specific characteristics.

“Markets are rallying on the news of the country’s reopening after the government abruptly abandoned its zero-COVID policy. We believe that both approaches to investing in China—fleeing the country or flocking to it blindly—are exercises in extremes that may not benefit investors in the long term. Instead, we believe the best approach to China is a measured one,” writes Lazard AM.

The asset management firm says investors must understand why China equity market is volatile and strategize considering political risks. Lazard talks about the performance of Chinese markets over the years and cites the decline of over 50% in 2008 which was followed by a gain of 62% in 2009.

Lazard talks about the political changes in China, such as the re-shuffling of the politburo after President Xi Jinping’s third term was approved. The Common Prosperity goal is at the core of Xi’s policies, which could impact the markets.

“The speed and severity of government intervention is understandably concerning for investors, especially if they have already felt its effects,” says Lazard, adding, “But it is important to note that Common Prosperity does not affect all companies equally, as companies that align with the Common Prosperity agenda will likely see their growth supported, not stifled, by regulation.”

Furthermore, the investment management firm talks about the value proposition in China equity market, where it believes that the key is to identify companies that are on the right side of regulatory reform. Lazard suggests targeting companies with stable financial health measured by return on equity and dividend yields, among others.

“In the context of emerging markets investing, we believe China is too large a market to ignore. It is home to the world’s largest population of over 1.4 billion, and to the world’s fastest-growing middle class,” sums up Lazard, but cautions that there are significant risks, which makes investing or exiting the nation with extremes might not be the best strategy for investors.

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