economic predictions

By Bernice Napach, ThinkAdvisor

So far, 2021 hasn’t been a very good year for Ark Investment Management, whose actively managed ETFs crushed almost all other ETFs in terms of performance in 2020. Year-to-date, five of its six actively managed equity ETFs have underperformed major market indexes, and its Space Exploration & Innovation ETF (ARKX) has hardly changed in price since its launch in March.

But things are looking up for Ark Invest. Performance of most of its ETFs, excluding the Autonomous Technology & Robotics ETF (ARKQ), has picked up in the second quarter.

Recently, the firm held its latest quarterly webinar reviewing performance and highlights of the previous quarter, where CEO and Chief Investment Officer Cathie Wood and fund managers offered their analyses of the recent past and outlooks for the future performance of their funds as well as the broader economy and market and selected industries.

Wood appeared confident about the future and about the stocks in which the firm invests. Ark is focused on the longer term — a five-year holding period for stocks that it believes will deliver 15% compounded annual return. Here are some economic and market predictions.

1. The coronavirus crisis has transformed the world significantly and permanently

As a result, Wood says, many innovation-driven stocks could be productive holdings during the next five to 10 years.

“In Ark’s view, autonomous electric vehicles and digital wallets, including cryptocurrencies and decentralized financial services (DeFi) associated more broadly with blockchain technologies, will disrupt and dis-intermediate both energy and financial services significantly during the next five years.”

She referred to the strong performance of the Ark Autonomous Technology & Robotics ETF, which outperformed all other active ARK ETFs year-to-date through June 30, and the Ark Fintech Innovation ETF (ARKF), which is one of the firm’s strongest second-quarter performers (up 6.34% by NAV and 5.89% by price) for the quarter and about 9% stronger by both measures year-to-date.

2. Among the transformations brought about by the pandemic is the work-from-home setup for many workers

“The stay-at-home phenomenon …. is here to stay,” Wood said, noting many companies including Roku, Shopify and Zoom have benefited, performing well in the second quarter.

She noted that some companies fit for more home-based services — like Teladoc Health, which is a top holding in the Ark Next Generation Internet ETF (ARKW) and flagship Ark Innovation ETF (ARKK) — didn’t do so well not because of the work-from-home transformation but because of competitive fears about other online companies, like Amazon, moving into health care. The giant retailer has plans to expand its Amazon Care on-demand health care service from serving its own employees to other companies nationwide.

3. Health care will be one of the biggest beneficiaries of advances in technology

Benefiting stocks like CRISPR Therapeutics, a top holding of the Ark Genomic Revolution ETF (ARKG), which she pointed out is not a biotech ETF but one “truly focused on the genomic revolution.” Intellia Therapeutics, which also uses CRISPR genome editing, is among the top holdings of the Ark Innovation ETF.

4. The risk to the economy is deflation, not inflation

“The nominal GDP growth is likely to be much lower than expected, suggesting that [scarce] double-digit growth opportunities will be rewarded accordingly.” Growth stocks are the bread and butter of Ark’s investments.

Wood noted that the recent decline in bonds yields — the 10-year Treasury yield has fallen from 1.74% in late March to around 1.30% currently — reflects the view that the market is more concerned about deflation than inflation, which was “a big surprise to those worried” about the latter.

Wood said the bond market is looking at inflation gauges other than the indexes for consumer and producer prices, which she said were “effectively lagging indicators.” She explained the bond market was giving more credence to other secular deflationary forces such as disruptive innovations.

5.  When traditional big banks define themselves as fintech companies, that doesn’t represent competition for fintech so much as validation

She likened the massive consolidation in the banking industry to the consolidation that has already taken place in retail.  “More massive consolidation in the banking space will benefit big players like JPMorgan just like disruption in the retail space benefits big stores like Walmart and Target.”

6. Cryptocurrencies can serve as a hedge against the confiscation of wealth

In addition, she noted that DeFi Ethereum reduces counterparty risk, because of the transparency of the network, which is not available in the traditional financial world.

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