Cathie Wood’s take on investing in China

Ark Investment Management’s flagship ARK Innovation ETF [ARKK] has struggled in 2021 because of the pullback in its characteristic growth stocks since mid-February. The fund closed on 12 February at $156.58, up 25.78% for the year, but by 8 March this had crashed to $110.26, down 11.43% since 2021 began. Despite a slump in May that saw the fund close 13 May at $99.48, it has recovered slightly since to close 16 August at $116.98, 6.03% down for the year, but 33.49% up over the trailing 12 months.

Part of the fund’s struggles during this period has been the fall in Chinese tech stock valuations, which Cathie Wood (pictured above), founder and CIO of Ark Investment Management, outlined in a recent company webinar.

 

China’s revaluation

“One thing that I think is happening is a revaluation,” said Wood at Ark’s July mARKet Update Webinar on 19 July. “It does seem, with Ant [Group] as the first example, that… the incentives to become incredibly successful in China are diminishing.” 

Ant Group, China’s largest payments provider, was on the verge of a $200bn valuation at what would have been the world’s largest-ever IPO in August 2020. However, plans for the listing were shelved after the Beijing government instigated the first of a swathe of moves aimed at curbing the growth of some of the country’s largest tech platforms.

“The government is expressing concern that some people have more power than the government would like them to have” - Cathie Wood

 

“The government is expressing concern that some people have more power than the government would like them to have,” said Wood.

Developments in the US have further suppressed the outlook for large, multinational Chinese companies. “The big surprise this year [is that] the new administration here in the United States is sustaining the policies of the old administration,” said Wood.

US President Joe Biden has surprised many onlookers by continuing an aggressive trade policy towards China begun by his predecessor, Donald Trump. Moves which included blacklisting Chinese tech companies with ties to the Chinese military or links to human rights abuses have been continued under the Democrat President, as have tariffs on Chinese goods and pressure on China to increase its imports of American goods by at least $200bn through the ‘Phase One’ trade agreement.

“In terms of these very large mega-cap companies being able to scale to other parts of the world,” Wood said, “there are some national security considerations that might either slow them down or stop them. So from a valuation point of view, these stocks have come down and probably will remain down.”

“In terms of these very large mega-cap companies being able to scale to other parts of the world, there are some national security considerations that might either slow them down or stop them. So from a valuation point of view, these stocks have come down and probably will remain down” - Cathie Wood

 

Where is Ark investing?

Wood and Ark have doubled their stake in Soaring Eagle Acquisition Company, a SPAC set to merge with Ginkgo Bioworks. Ark now owns more than 14 million shares, worth around $150m as of 9 August, in Soaring Eagle, split between ARKK and Ark’s Genomic Revolution ETF [ARKG]. Ginkgo’s pre-money valuation is $15bn and it expects to raise $2.5bn cash from the merger with Soaring Eagle.

Life sciences and genomics are seen as undervalued by Ark. During the July market update, Ark genomics analyst Alexandra Urman said that technological breakthroughs in the healthcare space could boost net present values of biopharmaceutical pipelines significantly.

“What we believe is that companies that are employing AI, next-generation sequencing and gene editing or potentially curative therapies are going to improve their chances of clinical success because of the use of these technologies,” said Urman. “Because most analysts typically use past trial throughput results as measures of future success, we really believe that they may not be taking into account how these new advances in technology are going to add to further success, and therefore they could be really underestimating pipeline assets.” 

“What we believe is that companies that are employing AI, next-generation sequencing and gene editing or potentially curative therapies are going to improve their chances of clinical success because of the use of these technologies” - Ark genomics analyst Alexandra Urman

 

Urman also outlined Arcturus Therapeutics’s [ARCT] place in the mRNA field. The company, she said, has “quite a leading position in systemically dosed or IV dosed vaccines”. Its delivery system uses self-amplifying mRNA, which means a smaller dose, “as well as a biodegradable, non-accumulating delivery system ideal for larger doses or inhaled doses for things like cystic fibrosis. We really think Arcturus could be a leader or differentiated from other companies based on their delivery system, their focus right now, and the mRNA that they use.”

Besides genomics, AI company UiPath [PATH] was highlighted by Ark AI and cyber analyst Will Summerlin. The company’s potential to automate “mundane tasks like filling out forms” has the potential “to create up to $2trn in value”.

Arcturus’s share price gained 7.91% in the year to 16 August, while UiPath’s fell 13.00%.