Catherine Wood’s macroeconomic forecasts are also at odds with those of her colleagues. (Photo: Canadian Press)
Investors would be wrong to abandon innovative companies for established companies, argues Catherine Wood, the founder of the specialist innovation fund Ark Investment Management, who was in Montreal on Thursday for the Forecast Night organized by CFA Montreal.
A well-known figure in the American financial media, Catherine Wood has developed a community of enthusiastic followers, eager for her countercurrent assumptions about the stock market and cryptocurrencies. In an interview, the US portfolio manager defended her views at odds with the strategists’ consensus.
The economy is about to be turned upside down by new technologies breaking with the past, believes Catherine Wood. “You have to go back to the era of the development of electricity, the telephone and the automobile to see so many innovative sectors at the same time,” she says.
His firm Ark Investment is trying to identify winners in five sectors: genome sequencing, adaptive control robots, energy storage, artificial intelligence and blockchain.
Catherine Wood believes that innovative companies have enormous potential for their shareholders. She estimates they are worth $7 trillion. “These 7 trillion dollars will reach 200,000 trillion dollars in 2030, she predicts her. These companies, which represent less than 10% of the global market, will represent half”.
This optimistic forecast contrasts with the pessimism of investors fleeing technology companies and growth stocks in the wake of rising interest rates, meaning the theoretical value of future earnings growth is lower. The value of his Ark Innovation exchange-traded fund (ETF), which owns companies including Tesla, Coinbase and Teladoc Health, has fallen 75% since its peak in January 2021.
Despite the fall, he persists and signs the one that the North American media present as an “evangelist of innovation”. She judges her investment universe to be in “considerable profit” territory.
He acknowledges that valuations for innovative companies are high. The sector’s enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio is, on average, about four times that of the S&P 500, the flagship index of large-cap US companies. She believes that the growth prospects of innovative companies justify this assessment. “We have never seen our strategy so undervalued.”
On the contrary, betting on established companies is riskier than you might think, according to Catherine Wood. She points out that traditional portfolio managers tend to take inspiration from major stock indices. “Traditional equity indices will underperform because they represent the established order. We focus on the New World.”
Yes to Bitcoin and Tesla, no to Celsius Network
Catherine Wood reiterates her optimism on the main cryptocurrencies, Bitcoin and Ethereum, at a time when this market has been undergoing a strong correction since the beginning of May. By cutting out the middlemen in the financial sector, blockchain would have the potential to make the market more transparent and stable, “even if it doesn’t show up these days,” she acknowledges.
It is more critical of crypto interest and lending platforms, such as Celsius Network, which has just suspended its transactions and in which the Caisse de dépôt has invested $150 million. “These promises of interest rates of 5% to 30% when the distribution of traditional markets was almost nothing have created excesses. There were unstable platforms.”
Tesla is one of the company’s largest investments. The manager also came to the defense of his founder, Elon Musk, when asked if his crusade to get his hands on Twitter was distracting him from running the electric car maker. If Elon Musk gets his hands on Twitter, Catherine Wood predicts that day-to-day operations will be handed over to a seasoned lieutenant.
Catherine Wood compares Elon Musk to the great inventors of the Renaissance. “There are people with strong opinions who want to make the world a better place. He is one of them.”
Towards deflation
Catherine Wood’s macroeconomic forecasts are also at odds with those of her colleagues. At a time when economists, central banks and households are eyeing rising inflation with apprehension, Catherine Wood fears the specter of deflation, a widespread fall in prices that leads to a slowdown in the economy.
She explains that US retailers Target and Walmart saw a sharp increase in inventory. Their managers claimed that they did not have the right products in stock because they arrived late and because consumption habits changed due to the lack of confidence and rising inflation. In May, Walmart said that almost 20% of the items in its inventory were products that the company no longer wanted.
“Walmart is one of the best managed companies,” says Catherine Wood. If it happened in a well-run company, I think that means it happened everywhere.
“Retailers have an inventory problem,” he adds. The way it will be resolved is through massive discounts. When people anticipate discounts, they don’t buy now, they wait. It will create even more short-term weakness.”
In the longer term, breakthroughs by innovative companies will lead to “positive” deflation, he predicts. “Innovation-related deflation is a good thing. This means reduced costs, higher productivity and lower prices. It could lead to a deflationary boom in sectors where we have identified strong innovation.”
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