Cathie Wood’s Ark Investment Management has exited all Chinese holdings from its flagship Ark Innovation ETF (ARKK), according to a recent interview with the CEO on CNBC. The move comes as China’s economy shows signs of a slowdown amidst government efforts to reign in tech companies and the real estate sector.
With nearly $9 billion in assets under management, the Ark Innovation ETF has shifted towards a more concentrated portfolio of Wood’s highest conviction stocks like Tesla, Coinbase, Roku, and Zoom. According to Wood, this is a typical strategy for Ark during bear markets.
“We get questions all the time about why we allow our strategies to get so concentrated in our highest conviction names. Well, that’s what happens in a bear market,” said Wood ↗.
At its peak in 2020, Ark Innovation’s exposure to China and other emerging markets reached about 25% of the portfolio. This was partly driven by Wood’s positive outlook on China’s response to the COVID-19 pandemic ↗. However, Ark’s view shifted as Beijing intensified oversight of tech giants like Alibaba and Tencent, cracked down on tutoring companies, and stressed deleveraging in the real estate sector.
Concerns Over Debt and Slowing Growth
In particular, Wood highlighted concerns about the mounting debt in China’s real estate development sector.
After years of rapid expansion, the country is “facing a reckoning” according to Wood. China’s property developers have over $5 trillion in outstanding debt, and distressed firms like Evergrande have struggled to make payments and spooked investors.
On top of real estate woes, China’s strict “zero-COVID” policies led to widespread lockdowns in major cities like Shanghai in early 2022. This disrupted production and consumer spending, resulting in China’s GDP contracting 2.6% in the second quarter.
More recently, although lockdowns have ended, economic data indicates the rebound may be losing steam. China’s GDP grew just 6.3% in Q2 2022, below expectations of 7.3%.
“It seems the post-COVID boom is over,” said Carol Kong, an economist at Commonwealth Bank of Australia. “All the low hanging fruit has been picked after the economy reopened.”
Ark Innovation Exits Chinese Holdings
As a result of the shifting landscape, Ark Invest gradually eliminated Chinese stocks from its Ark Innovation ETF over the past year.
Previously, the fund had holdings in companies like JD.com, Pinduoduo, and Tencent. But the portfolio now has no direct exposure to China.
The Ark Fintech Innovation ETF still retains a minor position in Chinese e-commerce firm JD.com. But Wood said the fund is focused on its highest conviction investments, such as Tesla ↗ which makes up over 10% of the portfolio.
Ark Innovation has rebounded strongly in 2022 after a steep decline in 2021, generating over 50% returns year-to-date for investors. Wood said she may consider investing in China again at some point.
“I do think that there will be times when we have more of an emerging market focus again,” Wood told CNBC. “I would imagine during bull markets, especially if we get more of a cycle of IPOs coming through or if some of the names that we’ve let go in this concentration move come back.”
With China’s economic growth appearing to moderate, it will likely remain a difficult environment for investors in Chinese stocks. However, some analysts argue there could be selective opportunities, especially if Chinese authorities pursue more supportive monetary and fiscal policies.
