Cathie Wood, the CEO of Ark Invest, has announced that her flagship innovation fund has completely exited China due to the country’s economic slowdown. The Ark Innovation ETF, which manages nearly $9 billion in assets, has divested from stocks generating revenue from China. This strategic move is part of a broader consolidation of the fund’s portfolio towards high-conviction bets such as Tesla, Coinbase, Roku, and Zoom, particularly during the market downturn.
In an interview, Wood told CNBC that Ark Invest typically concentrates its strategies on its highest conviction names during bear markets. As a result, Chinese stocks were gradually removed from the portfolio. The fund no longer has any exposure to China in its flagship strategy.
The changing stance on China and future prospects
The fund’s exposure to China and other emerging markets peaked at about 25% in 2020, driven by Wood’s admiration for China’s disciplined response to the Covid pandemic. However, her stance on China changed as Beijing began to tighten its control over the economy, cracking down on the ultra-wealthy and the tech sector.
Wood expressed particular concern about China’s real estate market, which has accumulated significant debt following over a decade of rapid expansion. She believes that China is now facing a reckoning in this regard.
In the second quarter of 2023, China’s GDP grew by 6.3%, which fell short of analysts’ expectations of a 7.3% increase. Despite being above the targeted 5% growth for the year, this was due to a lower base effect caused by COVID-19 lockdowns that impacted China’s GDP growth in Q2 2022. Economist Carol Kong from the Commonwealth Bank of Australia in Sydney commented that this data indicates that China’s post-COVID boom is coming to an end.
Additionally, China’s exports sector has weakened, with a 12.4% drop in exports in June——the largest decline in three years. The global economic slowdown is exacerbating the situation as it has reduced demand for Chinese exports. As a result, multiple brokerages have revised their growth outlook for China, with Goldman Sachs lowering its 2023 GDP growth forecast from 6% to 5.4% last month. Despite the slowing economy, China has recently ended its tech crackdown by allowing the downloads of Didi apps, approving Ant Financial’s request to raise capital, and announcing overseas listing rules for domestic companies.
The Ark Fintech Innovation ETF has retained a minor share in JD.com, a Chinese e-commerce firm. However, it has disposed of Chinese companies such as Pinduoduo and Tencent from its portfolio.
Despite the current exit from China, Wood indicated that she might consider reinvesting in Chinese stocks as the country navigates through this challenging period and the market enters a new bull cycle. She suggested that more diversification could be expected during bull markets, especially with the introduction of more IPOs and the reconsideration of some names that were let go in the concentration strategy.
Ark Invest’s flagship fund has had a successful year despite the challenges, with its top holdings rebounding from sharp losses triggered by rising rates. The Ark Innovation ETF has seen an increase of more than 50% in 2023.
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