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“Pouring billions of dollars into China now is a tragic mistake.” George Soros

Cathie Wood, the CEO of Ark Invest, has slashed her company’s investment exposure to China in 2021. Her actions came as Beijing’ tightened its authoritarian grip on domestic businesses and the economy. These actions has rattled global investors, wiping trillion of dollars off the value of Chinese stocks and triggering fears about the future of innovation in China, especially with China experiencing serious economic slowdown and real estate turmoil.

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Wood revealed that her Ark Innovation ETF has significantly reduced its exposure to China. Sweeping regulatory changes have made the investment environment riskier in,China, according to a Financial Times report. Additionally, the Chinese government has been accused by the U.S. and the international community of committing genocide specifically against the Muslim Uyghurs and other minorities which has resulted in several countries boycotting the 2022 Beijing Winter Olympics because of these allegations.

Almost every week late last year, China announced a regulatory crackdown aimed at reasserting its absolute control of its economy. The crackdowns included a banned on the ride-share company Didi from app stores a day after it listed on the New York Stock Exchange.

With Chinese authorities apparently focusing on social issues and social engineering at the expense of capital markets, Wood said, “We own very, very few stocks there [in China] because they’re unpredictable. They are grappling with what most governments are grappling with: the gap between rich and poor.”

Furthermore, Chinese authorities have been cracking down on cheap credit in an effort to cool the country’s real estate market that has been driven by speculation. These actions has caused China’s Evergrande Group, the world’s most indebted property developer, and other large property developers to default on bond payments. Wood is concerned that 75% of consumer savings in China is held in real estate, and real estate values have fallen in recent months. Her analysis: That the Chinese government is willing to risk the decline in real estate values and wipe out real estate investors in order to address the wealth gap.

Angel investor and entrepreneur Jason Calacanis commented: “I think the mad king is circling his wagons because he feels threatened. I’m talking about [Chinese President] Xi Jinping.”

President Xi Jinping’s has talked about “common prosperity” as a policy goal in China, and called on high-income Chinese enterprises to “return more [of their profits] to society”. These policies have been particularly focused on cracking down on the power of big private companies, such as e-commerce giant Alibaba and ride-hailing app Didi. Beijing’s policies have prompted investors to sell Chinese assets in 2021.

Moreover, Chinese companies in the technology, education and gaming sectors have faced an onslaught of draconian new rules relating to data privacy and workers’ rights in recent months. Chinese authorities have told the companies to “break from the solitary focus of pursuing profit or attracting players and fans.” Within the past several months, China barred online gamers under the age of 18 from playing on weekdays and limited their play to just three hours on weekends.

Cathie Wood is also circumspect about China’s demographics. China has been confronting the lowest fertility rates it has experienced in seven decades as well as a material gender imbalance. This is a growing concern to the Communist authoritarian government.

“I think President Xi is very unsettled that China’s three-child policy is not working. And that’s very forecastable,” Wood said.

Multinational U.S. companies have come under increased pressure both within China and internationally as they aim to comply with Xinjiang-related trade sanctions while simultaneously overlooking Chinese government’s crimes against humanity while continuing to operate in China. These companies issued marketing statements condemning the murder of George Floyd in the U.S. while turning a blind eye and remaining mute regarding genocide and mass murder in China.

Billionaire investor George Soros said BlackRock’s and other U.S. businesses who are investing billions of dollars into China now is a “mistake” and will likely lose money for the asset manager’s clients, according to an opinion piece in the Wall Street Journal.

“Pouring billions of dollars into China now is a tragic mistake,” Soros wrote in the op-ed. “It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies.”

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“Cathie Wood is a star stock-picker and founder of ARK Invest, which invests in innovations like self-driving cars and genomics.” Forbes

Cathie Wood founded ARK Investment Management seven years ago in 2014. One of the biggest secrets to ARK’s investment strategy and noteworthy success, according to Wood, is “the willingness to step in when others are selling a stock for very short-term reasons. We get great opportunities like that.”

Wood said it “pains me more than anything” to think clients might be panicking and selling at the wrong time.

Thus, Wood isn’t focused on short-term fluctuations. She takes a long term and bold view. “We have a five-year investment time horizon,” she says. Since, the big ideas blossoming todaywere planted 30 years ago, she says: “We are ready for prime time now.

Additionally, Wood and her team has been early on many themes—they embraced active management when investing seemed inexorably tied to indexing; they implemented stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a novelty, or both.

Investing in transformative technologies that are going to change the world

Wood’s focus has been on innovative companies with technology to disrupt the way we live. Her portfolios are loaded with stocks that have skyrocketed—for example, Tesla is a big holding in three of her funds. She is an advocate of a future where technology would make everything better, more productive and profitable.

As Wood and her company’s research frequently remind investors, electrification, the telephone, and the internal combustion engine turned the world upside down a century ago. Now, she believes that five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics—are bringing about an equally profound transformation of the economy. These innovations will converge, recombine into things like autonomous taxis and whatnot, and create a perfect economic storm of higher wages, falling prices, and wider profit margins.

Ark’s ideas start with their research. Wood researched stocks with dogged determination. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management.

For example, they state that they take a blank sheet of paper and just say, “What is an autonomous vehicle? What’s the right way to build one? What are the critical variables?” They believe that they will inevitably run into the companies that not only have good answers, but are leading the charge

She was on a mission to allocate capital to its best use—transformative technologies. Innovation is early-stage growth, and it is typically exponential growth. Companies developing these platforms can generate revenue growth of more than 20% [annually] for years and years.

Wood looked at places that other investment analysts ignore. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens.

Most growth companies have a decay rate, which means the bigger a company gets, the harder it is to grow. Exponential growth often includes network effects and virality, which means the more people joining the network, the more valuable it becomes, and the faster it grows.

Wood’s believes in transparency when financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. Every Friday morning, she convenes an investment ideas meeting with her analysts and outside experts that’s part business school seminar and part free-form futurist bull session. “Most compliance teams would not be comfortable with that,” Wood says. “From the beginning, ARK actively shares the knowledge they’re generating.

Conservative philosophy

The dawning of a high-tech future is central to Wood’s life philosophy. In starting ARK, her goal was “encouraging the new creation,” by investing in “transformative technologies that were going to change the world.” The triumph of innovation also fits well with her free-market views. To a younger generation tempted by socialism, she’s hoping to show that capitalism can still work its magic.

She’s conservative, both politically and economically. For decades she’s championed green investments. Wood has bemoaned President Joe Biden’s plans to spend big and tax the wealthy, even though many of his proposals are designed to bring the economy closer to her futuristic vision for it, and though higher capital-gains taxes could push more money into tax-efficient funds like hers. She warns that higher taxes on companies and investors will discourage future innovation.

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