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Over the past few weeks, Cathie Wood, the CEO, and CIO of Ark invest has exited out of almost all of her Chinese holdings. She recently sold over $300 million of JD, $40 million of Kanzhun, $110 million of Pinduoduo, $48 million of BYD Auto, $165 million of Baidu, and over $650 million of Tencent (Show the graphs of each one as I say it use the moving back and forth animation.
This move essentially reversed Ark’s decision to purchase Chinese stocks earlier this year in February. On the contrary, many value investors are taking advantage of the buying opportunity. Warren Buffett’s right-hand man, Charlie Munger, Ray Dalio, the CIO of the largest hedge fund, and Mohnish Pabrai, all believe that Chinese stocks are at a major discount right now.
Ultimately, this leaves one question for us investors, “Which side should we be on?”
This video will go in-depth on both sides of the debate and come to a conclusion on the heated clash in Chinese stocks. Welcome to Casgains Academy. If you’re new to the channel, please consider subscribing for more content like this, and let’s get right into it.
In Ark Invest’s July market webinar, Cathie Wood explained how we’ve already seen a valuation reset in Chinese stocks due to a few reasons. The essence of capitalism is that through a desire to generate wealth, productivity and innovation are created. With China’s new regulations on successful companies like DiDi, Ant, and Tencent, Cathie believes that the incentive for success has diminished in China. And because of this, Cathie thinks that less innovation and advancement will occur over the long term.
In addition to lowered incentives, many believed that Biden would be more lenient on China than Trump, but we’ve seen Biden Administration continue to be harsh on China. In fact, most recently, a Chinese state-run media outlet accused Biden of threatening war. The result of the rising tensions between the US and China is the possibility for strict business restrictions for foreign companies. For example, Alibaba is rapidly expanding its AliExpress marketplace into Europe. However, if there are some security concerns, then this expansion may not occur as expected. Cathie sees this possibility as a major detriment to future growth.
The last reason for Ark selling out of China is because of short-term valuation concerns. Cathie Wood often focuses on long-term movements, but she also looks at short-term trends and actively trades them. In terms of Chinese stocks, Cathie believes that valuations will remain low for a while because there are no short-term regulatory catalysts. Therefore, it is possible that we see Cathie Wood and Ark Invest buy back into Chinese stocks in the future.
Cathie Wood is currently betting on a short-term trend that stay-at-home services will remain stronger than expected. As a result, it is possible that she would rather allocate capital to this bet instead of investing in Chinese assets that will likely remain low for the short term. On the other side of the debate, many value investors believe that the Chinese capital markets are currently very attractive. Most investors regard Warren Buffett as the greatest investor of all time, and rightfully so, as he has an incredible long-term track record. However, behind Berkshire Hathaway, there are many investors that helped Berkshire become what it is today. Two of those people are Li Lu, the Buffett of China, and Charlie Munger, the right-hand man of Buffett. Both of these successful investors believe that Chinese assets are incredibly undervalued right now. Li Lu is a successful fund manager who according to several sources, has averaged a return of 20% per year since 1998. That is absolutely impressive, and one of the primary ways he has done this is by investing in international investment opportunities, with China in particular. In fact, Li Lu was the one who convinced Munger and Buffett to purchase BYD Auto, a stock that has grown by 59 times in value since Berkshire’s initial investment in 2008.

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