Cathie Wood's China Breakup: Why Ark's Flagship ETF Exited From Alibaba And Other Stocks

Cathie Wood-run Ark Investment Management's flagship exchange-traded fund, the Ark Innovation ETF ARKK, has exited Chinese stocks amid a crackdown on high-profile big tech companies in the Asian country.

What Happened: According to the quarterly fund webinar held on Thursday, Wood was initially impressed with China’s disciplined fiscal policy responses after the COVID-19 pandemic. 

However, concerns arose in November 2020, particularly around Alibaba Group Holding Ltd BABA, Alipay, and founder Jack Ma‘s situation. 

“We began to wonder, Oh no! Is this a broad-based crackdown by the government on any company or person with too much power,” Wood said.

“And that’s exactly what it was and as it turns out in hindsight, and they were cracking down in a lot of other ways as well.”

As the regulatory crackdown on monopoly power expanded to other major Chinese names, including Tencent Holding Limited TCEHY, Ark Invest’s strategies faced challenges in 2021 and 2022 due to fears of interest rates and inflation. 

See Also: Best Chinese Stocks

Consequently, Ark concentrated its strategies on high-conviction names, leading to a gradual exit from Chinese stocks.

Wood noted that the flagship strategy now has no exposure to China, with a shift towards diversification, considering new IPOs and reevaluating previously dropped names. 

She highlighted Argentine e-commerce retailer MercadoLibre, Inc. MELI, an emerging market stock, which Ark holds in other strategies, and said the stock has been terrific for the fund.

China Disappoints: Wood also expressed disappointment in China’s economic growth after the country ended its zero COVID-19 policy. 

She noted that foreign direct investment dropped from $100 billion in the first quarter of 2022 to $20 billion in the first quarter of 2023. The situation will worsen when more companies diversify their supply chains, according to forecasters, the fund manager said.

China is now at the margin as it has downshifted from 15 years of double-digit GDP growth rate to high-single-digit growth now, she said.

“A growth like that can cover a lot of sins, and those sins usually involve debt and importantly, in the property space,” she added.

“And so we do believe that China is facing its state of reckoning in this regard.”

Related Link: China’s Q2 GDP Miss Stirs Unease: Alibaba, BYD, Other Stocks In Focus As Analysts Point To Consumer Slowdown