Cathie Wood looks all over the globe for opportunities for her Ark Invest exchange-traded funds (ETFs). But the nation with the world's second-largest economy is no longer on her radar.
Last week, Wood revealed that she has practically thrown in the towel on Chinese stocks. Should you follow her lead?
Going, going, gone
In 2020, close to 25% of Ark Innovation ETF's (ARKK 1.05%) holdings consisted of Chinese stocks. The portfolio of Wood's flagship ETF included Chinese technology giants such as Alibaba Group (BABA 0.59%), Tencent (TCEHY 2.19%), and KE Holdings (BEKE 7.39%).
However, in 2021 Wood began to reduce Ark Invest's exposure to the stocks of some companies based in China. She stated at that time that Ark Invest wasn't giving up on China. Instead, Wood said that her ETFs would focus more heavily on "companies that we know are courting the government with 'common prosperity'."
Later that year, Wood's Ark Autonomous Technology & Robotics ETF (ARKQ 2.52%) loaded up on Chinese electric vehicle (EV) maker XPeng (XPEV 10.73%). In 2022, the ETF invested in two other Chinese EV stocks -- adding to its stake in BYD (BYDD.F 4.71%) (BYDDY 4.08%) and initiating a new position in Nio (NIO 8.72%).
Now, though, Wood has almost given up on China altogether. She said at an investor webinar on July 20 that ARKK now has "no exposure to China." ARKQ has exited all of its Chinese positions as well. The only outlier is Ark Fintech Innovation ETF (ARKF 1.97%), which still holds a small position in Chinese e-commerce company JD.com (JD 6.12%).
Behind Wood's moves
What has caused Wood to become so disenchanted with Chinese stocks? It started in late 2020 with the Chinese government's crackdown on Alibaba following then-CEO Jack Ma's public criticism of China's financial regulators.
Wood stated in the webinar last week, "We saw the trouble that Alibaba, Alipay got into -- Jack Ma specifically, and we began to wonder, 'Oh no, is this a broad-based crackdown by the government on any company or person with too much power?'" She added, "And that's exactly what it was, as it turns out, in hindsight."
But that was only the beginning. Wood is concerned that foreign direct investment in Chinese companies has plunged from $100 billion in the first quarter of 2022 to $20 billion in the first quarter of this year. She believes that this trend could continue as companies reduce the dependency of their supply chains on China.
Wood also noted that China's growth has slowed significantly. For 15 years, the country delivered double-digit percentage GDP growth. Now, the Chinese economy is growing only in the high single digits. Wood said that Ark Invest "believe[s] that China is facing its day of reckoning in this regard."
Should you avoid China stocks, too?
Retail investors shouldn't blindly buy or sell any stocks just because a famous investor does. However, Wood's concerns about China have merit. Investing in Chinese stocks comes with greater risks due to the uncertainty about what actions the Chinese government could take. This risk is also a key factor behind companies' moves to diversify their supply chains. It's also worrisome that China's economic growth is deteriorating.
All this means most investors probably are better off avoiding most Chinese stocks. However, there are some potential exceptions.
Aggressive investors with long-term perspectives could be interested in some Chinese stocks with especially attractive valuations. For example, Alibaba's shares currently trade at a forward price-to-earnings multiple of below 10.5.
All this means opportunities for investors still exist in China -- but those opportunities aren't for the faint of heart.
