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Market Insights

ARKK - too soon to call it a comeback?

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Stock Of The Week: ARKK

Too soon to call it a comeback?

ARKK, the innovation ETF fronted by the enigmatic Cathie Wood has bounced from recent lows. Is it too soon to call it a comeback? All eyes on the US CPI report this week for the potential impact.

First, a bit of history. ARKK rose to prominence just before the pandemic after years of quiet outperformance. By the end of 2019, the Ark Innovation ETF (ARKK) had returned 165% in just three years and was the best-performing fund over the same period.

The business model is to acquire shares in businesses that are ‘Disruptive Innovators’, defined by ARK as “the introduction of a technologically enabled new product or service that potentially changes the way the world works.”

More specifically, companies relevant to this theme are those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to:

  • Genomics* (“Genomic Revolution Companies”);
  • Innovation in automation and manufacturing (“Automation Transformation Companies”);
  • Transportation, Energy (“Energy Transformation Companies”);
  • Artificial Intelligence (“Artificial Intelligence Companies”) and materials;
  • Increased use of shared technology, infrastructure & services (“Next Generation Internet Companies”);
  • Technologies that make financial services more efficient (“Fintech Innovation Companies”).

The early outperformance coupled with the pandemic disruption and trading boom sent the ARKK ETF soaring throughout 2020, before posting a record high just shy of $160 in February 2021. The ETF has now fallen below the pre-pandemic high, and is down just over 68% from the height of the craze.

ARKK Share Price

One of the factors cited in ARKK’s early success was the lack of good investment opportunities in a low inflation world. Economic growth in prior decades could be largely explained by boomer-fuelled growth. As a population grows, so does the economy. As that economic tailwind faded, and a decade of low inflation replaced it, one big assumption was that demographics had taken their toll.

The developed world was supposedly heading the way of Japan where the population has already peaked, and the country has been experiencing very low inflation, even outright deflation at times.

The recent inflation surge and increase in interest rates have coincided with the downturn in ARKK’s fortunes.

Cathie Wood sees these disruptive innovators as a hedge against deflation. And she also thinks inflation won’t be a problem for much longer…

"All of these are signals that inflation is going to come down, it's going to come down significantly. And we're probably going to see some deflation,"

Which could be a boost for ARKK and other growth stocks. Cathie’s looking on the bright side:

"Typically, growth stocks will outperform as we move towards the end of a bear market and the end of a recession because they are the new leadership. It looks like we bottomed on an intraday basis based on our flagship strategy on May 12."

This week’s US CPI figure is expected to show inflation slowing significantly. The June print came in at a whopping 9.1% YoY and 1.3% MoM. The average forecast has July’s numbers at 8.7% and 0.2% respectively.

The key question: Could a miss on this data point give a boost to growth stocks and ARKK?

Not investment advice. Past performance does not guarantee or predict future performance.

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