Ark Innovation ETF

ARK Invest’s Cathie Wood sees value stocks bubble

High growth tech stocks being battered by inflation and fears of interest rate hikes are set to be the “prime beneficiaries” of a looming US recession, Cathie Wood, chief investment officer at ARK Invest, said in the company’s fourth-quarter report.

Wood said in the investment group’s quarterly update that long-term fears about rampant inflation were “overblown”. Instead, she urged the market to focus more on the risk of a US recession in the next three to six months, as well as the serious economic slowdown in China and emerging markets.

Tech stocks start 2022 in a weak position

Higher inflation and the prospect of interest rate hikes to combat it has weighed heavily on growth stocks, such as tech firms and innovation-driven companies, since the start of the year.

ARK Invest’s flagship fund — the ARK Innovation ETF [ARKK] — has seen its share price drop by 21.3% since the start of January, after a 24% year-over-year decline in 2021. In comparison, the fund surged 150% in 2020 during the flurry of tech investments in stocks such as video communications group Zoom [ZM].

However, Wood said that retail inventories stacking up during the supply chain squeeze and weak consumer consumption would mean that US headline consumer price inflation of 6.8% year-over-year would “likely unwind during the next year”.

Growth stocks may benefit from economic headwinds

The Chinese economy slowing in response to the government crackdown on real estate, social media and other sectors was also beginning to put downward pressure on commodity prices, Wood added.

“If we are correct in our assessment that the risk to the outlook is deflation, not inflation, then nominal GDP growth is likely to be much lower than expected, suggesting that scarce double-digit growth opportunities will be rewarded accordingly,” Wood said. “Growth stocks in general and innovation-driven stocks specifically could be the prime beneficiaries.”

The ARK Invest CEO added that the coronavirus crisis had transformed the world significantly and permanently, suggesting that many innovation-driven stocks could be productive holdings during the next five to 10 years.

Wood said that, by focusing primarily on inflation, the equity markets “seem to be ignoring the significant headwinds facing traditional industries”, including car manufacturing.

“In our view, the real bubble could be building in such so-called ‘value’ stocks with much higher valuations in the context of a five-year investment time horizon as opposed to last year,” she wrote. “Meanwhile, the valuations of many innovation-related stocks have been cut in half. In our view, the wall of worry built on the back of high multiple stocks bodes well for equities in the innovation space.”

ARK’s ETFs underperform in Q4

Despite her optimistic outlook for the future of innovation-driven stocks, Wood said that ARK’s six actively managed ETFs and three self-indexed ETFs underperformed during the fourth quarter in comparison with the S&P 500 and the MSCI World Index.

Among the top detractors in its ARK Autonomous Technology and Robotics ETF [ARKQ] were UiPath [PATH] and Kratos Defense and Security [KTOS]. However, Wood remains confident that UiPath remains well-positioned to benefit from the use of AI to increase knowledge workers’ productivity. Among the top contributors were Tesla [TSLA] and Unity Software [U].

The ARK Next Generation Internet ETF [ARKW] was weighed down by holdings such as DraftKings [DKNG] and Twitter [TWTR], whose user growth in the US decelerated in the third quarter.

The ARK Genomic Revolution ETF [ARKG] was hit by Teladoc Health [TDOC], which was “punished by the stay-at-home stock selloff”. However, Wood believes the market is “missing the competitive differentiators that transcend Teledoc’s role as a dominant telemedicine provider”, such as data science and AI. She believes that Teladoc could become the US healthcare industry’s backbone.

The ARK Fintech Innovation ETF [ARKF] also underperformed with top detractors like Robinhood Markets, despite Wood stressing that it “could evolve into one of the more influential digital wallets”.

Innovation in the tech space could help growth stocks

Amid uncertainty for tech stocks in 2022, Wood hopes that continued investment in innovation will help the sector recover, with likely knock-on effects for ARK ETF share prices. 

JD Logistics contributed to the underperformance of the ARK Space Exploration and Innovation ETF [ARKX] as it struggled with pressure on Chinese stocks, fear of the omicron variant of Covid-19 and congested supply chains.

Wood, however, believes that JD Logistics [2681.HK] could benefit as China aims to accelerate the pace of autonomous technology, experimenting with drones and last-mile delivery vehicles.

The ARK Innovation ETF’s underperformance included the struggles at Zoom, which was also hit by investors turning away from ‘stay at home’ stocks, but Wood is confident about the conferencing platform’s future.

“Given the critical nature and frequent use of communications tools, many organisations seem willing to pay a premium for superior solutions. Because it has invested aggressively in unified enterprise communications infrastructure, we believe Zoom is delivering superior audio and video performance compared to its competitors and has expanded beyond video conferencing with Phone and Rooms,” Wood said. “Zoom is well-positioned to disrupt the nearly $1.5trn enterprise communications market.”

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