High-profile technology investor Cathie Wood has told Australian investors she believes deflation is a key risk on the horizon after rising interest rates and inflation have smashed her innovation-focused fund Ark Investment Management.
Wood, whose fund has posted heavy losses in the past year due to its big bets on beaten-up tech stocks including Zoom, Block and Coinbase, on Thursday argued the investment case for the tech sector despite what she said was the worst bear market she had experienced.
Cathie Wood says the “tide is turning” on inflation.Credit:Sam Mooy
Addressing a Morgan Stanley conference in Sydney remotely from the US, Wood said the plunge in some technology stocks - which are down as much as 80 per cent - was due to fears of inflation and rising interest rates, which cut the valuations of growth companies.
However, she argued the fund’s favoured type of stocks were now “way oversold,” and warned that “the bigger risk from here on is not inflation, it is deflation”.
Wood conceded supply chain problems and the Russian invasion of Ukraine had interrupted an earlier “narrative” of deflation, but questioned claims they would lead to long-term high inflation. She said there were recent signs major US retailers such as Walmart and Target had built up excess inventories, which they would need to clear by discounting.
“We are seeing these massive retailers, the best supply chain managers in the world, with inventories up 30 to 40 to 70 per cent year over year, as their sales are up only 3 per cent,” Wood said.
‘I think many people are looking now at the risks of not inflation going up, but inflation turning into deflation.’Cathie Wood
“What I believe we are experiencing right now is a massive inventory cycle, and Target and Walmart are basically telling us, we are going to clear our shelves by cutting prices.
“So I think this idea that these supply chain and raw material prices are going to end up in long-term pricing - I think that’s coming under serious question right now. And I think many people are looking now at the risks of not inflation going up, but inflation turning into deflation.“
Wood said the fact that 10-year government bond yields were at about 3 per cent was a sign the bond market was not buying the narrative of 5, 6 or 8 per cent inflation. “I think the tide is turning, and it couldn’t happen too soon for us,” she said.
Ark’s flagship exchange-traded fund enjoyed phenomenal success during COVID-19, as low interest rates fuelled a surge in technology stocks and services such as Zoom entered the mainstream. But the fund peaked in February last year, and Wood said its peak-to-trough fall had been about 75 per cent.
Wood made the remarks in a wide-ranging discussion that explored the investment potential of innovations ranging from autonomous vehicles to space travel, hypersonic flight, artificial intelligence and industrial robots.
Wood, who is also a major backer of Elon Musk’s Tesla, said it had been a brutal period for tech valuations, and argued investors were “running for the hills” by retreating to stockmarket benchmark indices.
“This has been more than a correction. This has been the worst bear market I’ve ever experienced, and it’s astonishing to me because we’re at the threshold of the most explosive innovation age in the history of the world,” Wood said.
On digital assets, Wood said she remained a strong believer in bitcoin, and she thought the cryptocurrency was “pretty well through” the recent selloff in its value, which has seen it plunge about 50 per cent. But she said that before adding to its crypto bets, her fund wanted to be sure there were not other stablecoins that could lose their peg, as occurred with TerraUSD last month.
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