Though inflation fears, supply chain issues and tensions between Ukraine and Russia have rocked stock markets, ARK Invest’s Cathie Wood highlighted the importance of innovation stocks and the role that tech solutions can play in this period of turbulence.
There is “never a dull moment” in the markets, star stock picker Cathie Wood (pictured), CEO and CIO of ARK Invest, said in a webinar on 15 March 2021. That sentiment has never been truer in the year since, as volatile world events shake market expectations that the US Federal Reserve would hike interest rates “seven or eight times” in 2022.
In a market outlook webinar that took place on 8 March, Wood explained that with consumer sentiment — hit by rising inflation and the Russian invasion of Ukraine — plummeting to levels not seen since the financial crisis, the central bank may only raise interest rates once this year. “The Fed is expected to raise interest rates by 25 basis points this month. But it could be a case of one and done,” the chief executive of the investment management firm said.
The Russia-Ukraine conflict’s impact on energy and food prices has weighed down consumer sentiment back to 2008/9 levels. “Europe will be in recession if they are not there already. The US is a harder call, as capital spending and housing remain firm, but will it last? The consumer savings buffer built up by stimulus payments during the Covid crisis has also disappeared and people are feeling a little uncomfortable. Consumption has stalled as people pull their horns in,” Wood explained.
“Europe will be in recession if they are not there already. The US is a harder call, as capital spending and housing remain firm, but will it last?” – Cathie Wood
Headwinds for growth stocks
Despite inflation being higher than she ever expected, and supply chain bottlenecks caused by Covid-19 exacerbated by the Russia-Ukraine conflict, Wood predicted that inflation would not become embedded into the economy as it did in the 1970s.
“The main reason why is velocity of money. In the 70s it increased as people spent ahead of expected higher rates and prices. We aren’t seeing that now. Velocity will turn down given consumer spending fears,” she noted, adding that expectations of multiple interest rates had already been priced into the market, particularly for innovation stocks.
Fears of higher inflation, interest rate rises and the impact of war in Ukraine have battered ARK funds since late February, as investors steered away from growth stocks. The firm’s flagship ARK Innovation ETF [ARKK] has tumbled 38% in the year-to-date (through 8 March).
Wood still bullish on innovation
While public market valuations for cutting-edge tech stocks have fallen, late-stage private market valuations have soared, according to observations made by Wood.
“The private innovation firms are still able to achieve an increase in their valuation. We believe investors should give serious consideration to increasing their allocation to innovation in the public markets,” she said on the webinar.
Wood still firmly believes that “innovation solves problems” and that the Ukrainian conflict coupled with supply chain bottlenecks and falling energy and food prices would see more consumers and businesses accelerate the adoption of technology.
She added that one of the stickiest places for inflation historically has been healthcare. But with the genomics precision medicine revolution, companies will be able to better understand the return on investment from research and development (R&D) and save costs. Wood noted that most of the stocks in ARK’s portfolios offered these solutions.
“At some point the market will recognise the superior revenue growth and increasingly the cash flow generation in our portfolios,” she said. “The world is changing at an increasingly rapid rate. When there is turmoil of the kind we are experiencing now and consumers and business become fearful, then they are willing to make changes. The coronavirus rewarded our strategies, and we expect the same again given the many problems we are facing now.”
War in Ukraine highlights need for innovation
The Russian-Ukraine conflict has already shown how important innovative technologies can be. Some examples that Wood highlighted were how SpaceX sent up Starlink satellites to supply internet access to the Ukrainian people as well as crypto being used as a platform to send donations of more than $50m.
“We are also seeing crypto transactions increase not only in Ukraine but also by ordinary individuals in Russia as their wealth and purchasing power is destroyed. They are flocking to use Bitcoin as a currency hedge,” she explained.
In terms of finding a solution to soaring energy and oil prices caused by the war, Wood said she expected an accelerated shift away from fossil fuel powered cars. “If energy is our biggest problem, then it is an invitation for electric vehicles. We think the shift towards them will increase… With autonomous vehicles, we expect – in the not too distant future — that vehicle miles travelled on taxi platforms will take much more share from gas miles travelled.”
“We are also seeing crypto transactions increase not only in Ukraine but also by ordinary individuals in Russia as their wealth and purchasing power is destroyed. They are flocking to use Bitcoin as a currency hedge” – Cathie Wood
Wood expects other technologies such as artificial intelligence machines to help solve labour shortages and bottlenecks. She also sees increased adoption of 3D printing in supply chain management “as we bring production closer to home”.