(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.
Most Read from Bloomberg
The Federal Reserve isn’t going to hike rates as much as markets are currently betting, according to Cathie Wood.
The strategies of ARK Investment Management LLC, where Wood is founder and chief executive officer, have struggled recently amid fear of inflation, she said via video to the Seedly Personal Finance Festival in Singapore. The firm’s flagship ARK Innovation ETF is down 45% year to date.
Wood expects inflation to end its spike and then decline in “dramatic” fashion, she said. Such a scenario might give the Fed leeway to boost rates less aggressively than is currently seen.
There could be “a surprise in terms of interest rates not going up as much as the market has priced in,” Wood said.
Inflation in the U.S. is currently around the highest level in four decades, a situation that’s helped spur the Fed to start boosting rates — thus pressuring risk assets like the stocks Wood and ARK tend to favor. Markets on Friday were pricing in four back-to-back half-point increases by the Fed. Late on Thursday, there were even a couple of trades anticipating multiple 75-basis-point hikes.
Wood’s funds aren’t the only assets sagging. The tech-heavy Nasdaq 100 is down 18% in 2022, and the S&P 500 off 10%. There’s growing discussion about whether the Fed can engineer a soft landing for the U.S. economy, or whether an aggressive pace of hikes could hurt the job market or tip the economy into a recession.
“We do believe that the Fed is getting lots of messages right now that it should not tighten too much,” Wood said.
Other things Wood said:
On disruptive innovation, NFTs
“Truly disruptive innovation” accounts for $10 trillion, which is less than 10% of the global equity market capitalization, Wood said.
“We believe that $10 trillion will go to $210 trillion in the next eight years – that is a 40% compound annual rate of return. And we would expect that from our strategies as well, they’re very depressed right now.”
Non-fungible tokens represent the first global, immutable, digital property-rights system, she said. Economists such as Hernando de Soto and Thomas Sowell “will tell you the one way to pull people and countries out of poverty is property rights. And so we think this is the extension of physical property rights into the digital world”
On a Morningstar downgrade
Morningstar downgraded the ARK Innovation ETF to negative from neutral.
“Morningstar is a provider of indexes, and ARK does not pay attention to indexes. I do not believe Morningstar understands what we’re doing – we are not looking at indexes to screen for ideas for our portfolios. We are using original research to screen for our ideas.”
“In terms of the concentration risks: this is really what Morningstar does not understand about ARK.”
During drawdowns, “we concentrate our portfolio toward our highest-conviction names” and “when we have done this over time the results have been exceedingly good coming out of a bear market.”
On China investment
In China, “we’ve dialed down our exposure and we do feel that many of the moves have been very hostile to capital. And so it makes sense that capital is leaving China to some extent. But we also know that China wants to be a champion of innovation. And innovation solves problems.”
She recommended looking for electric-vehicle winners, while being cautious on technology companies with high margins because the government will likely want the margins to come down.
(Updates chart.)
Most Read from Bloomberg Businessweek
©2022 Bloomberg L.P.
