ARK Funds Are Offloading Their Exposure To China-Based Equities

Never one to be the contrarian, Cathie Wood’s ARK Invest has “had enough” of Chinese stocks after the recent Didi debacle. ARK has been unloading its Chinese stocks, with holdings falling to the “lowest on record”, Bloomberg noted this week.

The country has a less than 1% weighting in ARK’s Innovation ETF, down from 8% in February, the report notes. China’s weighting in ARK’s fintech ETF remains 18% and has fallen to 5.4% in the firm’s Next Generation Internet ETF.

Much of the drop in ARK’s respective weightings comes from Wood offloading shares of Tencent and JD.com, as well as valuations of other names collapsing. 

“From a valuation point of view, these stocks have come down and again from a valuation point of view, probably will remain down,” Wood said this week. We can’t help but ask: all of a sudden valuation now matters to Wood? That’s odd.

“I do think there’s a valuation reset,” she continued.

But the firm hasn’t changed its 5 year outlook or price targets on Chinese names it still owns. Ark’s Asia innovation analyst Yulong Cui said this week: “This is largely because the regulatory changes have not, for the most part, impacted the businesses from a fundamental point of view with regards to cyber security clients or U.S. listing reviews.”

Sebastien Galy, a senior macro strategist at Nordea Investment Funds, told Bloomberg that Chinese equities are “very momentum oriented being loaded on Tech and it likely made sense to reduce the footprint faced with regulatory pressure to encourage more competition in China.” He emphasized that “regulatory scrutiny is here to stay for the next few years”. 

Matthew Kanterman, an analyst at Bloomberg Intelligence, concluded that “the regulatory overhang and crackdown on the use of consumer data could still represent a structural headwind to the growth of these companies.” 

The move comes after $1 trillion of market value in China-based equities has already disappeared amidst a crackdown from Beijing. Additionally, the Hang Sang Tech index is down 9% for the year. 

Maybe it’s time to dive back into Chinese equities after all…