Cathie Wood of ARK Invest has said that her Innovation ETF (NYSE: ARKK) has exited all Chinese stocks. Here are the key takeaways.
To begin with, after massive losses in 2021 and 2022, ARKK has rebounded in 2023 and is up around 50% – outperforming the broader market. The ETF has assets of around $9 billion and houses names like Tesla, Coinbase, Block, and Zoom Video Communications.
The ETF had exposure to Chinese companies like Tencent and KE Holdings but Wood has said that it no longer holds any Chinese stocks.
Cathie Wood exits Chinese stocks
In a prerecorded investor webinar on Thursday, Wood said, “As we always do during bear markets, we concentrated our strategies towards our highest conviction names and the Chinese names, in particular, came out one by one as we were concentrating so that now, at least in the flagship strategy, we do have no exposure to China.”
Emerging market stocks once formed a quarter of ARKK’s holdings
Wood said that in 2020, emerging market stocks formed 25% of ARKK’s holdings. She was impressed with the way China initially handled the COVID-19 pandemic. Notably, even as the coronavirus allegedly originated in China the country had among the lowest fatalities in 2020.
It managed to prevent the fatalities without much damage to the economy and was the only major economy that grew in 2020 while all major economies witnessed a contraction. Also, China did not resort to the kind of aggressive monetary and fiscal policy actions as the developed world.
Chinese stocks fell during the tech crackdown
However, China began a massive tech crackdown in 2021 which hurt investor sentiment. Back then also Wood had warned about Chinese stocks and said, “The incentives to become incredibly successful in China are diminishing somewhat now that the government is expressing concern.
She added, “Some people feel they have more power than the government would like them to have. So, I do think there’s a valuation reset.”
Also, the Chinese real estate sector, which has historically been a key contributor to its growth has sagged and developers are reeling under the impact of huge debts.
Wood said, “It was responsible for roughly 15 years of double-digit real GDP growth … and growth like that can cover a lot of sins.”
She added, “And those sins usually involve debt, and importantly in the property space, we do believe that China is facing its day of reckoning in this regard.”
China’s GDP growth has sagged
China’s GDP increased by 6.3% in Q2 2023 which was below the 7.3% increase that analysts were expecting. The world’s second-largest economy is targeting GDP growth of 5% in 2023. While the Q2 GDP growth is above that level, it’s because of the lower base effect as China’s GDP growth sagged in the second quarter of 2022 due to its COVID-19 lockdowns.
Commenting on China’s Q2 GDP growth, Carol Kong, an economist at the Commonwealth Bank of Australia in Sydney said, “The data suggests that China’s post-COVID boom is clearly over.”
China’s exports sector has also weakened and its exports fell 12.4% in June which is the biggest drop in three years. The global economic slowdown is not helping matters either as it is leading to lower demand for Chinese exports.
Multiple brokerages have revised down China’s growth outlook and last month Goldman Sachs lowered China’s 2023 GDP growth forecast from 6% to 5.4%.
China’s tech crackdown
Amid a slowing economy, China also seems to have ended its tech crackdown. It allowed the downloads of Didi apps, approved Ant Financial’s request to raise capital, and also announced overseas listing rules for domestic companies.
The country has also hosted multiple business leaders including Apple’s Tim Cook and Tesla’s Elon Musk this year, in an apparent bid to attract more investments and reaffirm its position as an attractive outsourcing hub.
The lost decade for Chinese stocks
Chinese stock markets are still below their 2007 highs and according to a Wall Street Journal report, the per-share earnings are the same as they were in 2013. The report adds that productivity in China has been falling since it peaked in 2010 and raises the question that the world’s second-largest economy could go like Japan whose markets peaked in the late 1980s.
China has admitted to trade troubles taking a toll on its exports
China’s Commerce Ministry has admitted that its exports sector, which is a key driver of its economy, has been hit due to what it described as “politicization of trade.”
Notably, several countries, especially the US and India have been looking to diversify their supply chains. While the US started cracking down on imports from China under former President Donald Trump, who imposed tariffs on billions of dollars of Chinese goods, the process continued under the Biden administration.
Several US companies have diversified their supplier base from China and have increased sourcing from other Asian markets. Apple for instance is increasing its focus on India and its leading supplier Foxconn is expanding its production capacity in India.
US-China trade war
Notably, it is not that the US is only looking to lower imports from China but is also restricting exports of critical technologies, especially advanced chips.
Last year, the US imposed restrictions on exports of several chips to China including Nvidia’s A100. The company however managed to circumvent the ban by selling A800 chips to China whose performance was below the limits that the Commerce Department had set.
The US is reportedly looking at banning more chip exports to China including the A800 chip.
Wood says she might consider Chinese stocks in future
Meanwhile, Wood said that she might consider Chinese stocks in the future once the country overcomes its current challenges.
She said, “More diversification during bull markets, especially as we get more IPOs and as we reconsider some of the names that we let go in our concentration strategy.”
Notably, after China’s tech crackdown, Chinese stocks became “uninvestable” for many US fund managers. While the country has tried making rapprochements with both domestic and foreign tech companies, the structural slowdown is not helping matters for the economy.
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