‘Tide is turning’: While world focuses on inflation, Ark’s Cathie Wood sees risk of deflation

High-profile technology investor Cathie Wood has told Australian investors she believes deflation is a key risk on the horizon after rising interest rates and inflation have smashed her innovation-focused fund Ark Investment Management.

Wood, whose fund has posted heavy losses in the past year due to its big bets on beaten-up tech stocks including Zoom, Block and Coinbase, on Thursday argued the investment case for the tech sector despite what she said was the worst bear market she had experienced.

Addressing a Morgan Stanley conference in Sydney remotely from the US, Wood said the plunge in some technology stocks – which are down as much as 80 per cent – was due to fears of inflation and rising interest rates, which cut the valuations of growth companies.

However, she argued the fund’s favoured type of stocks were now “way oversold,” and warned that “the bigger risk from here on is not inflation, it is deflation”.

Wood conceded supply chain problems and the Russian invasion of Ukraine had interrupted an earlier “narrative” of deflation, but questioned claims they would lead to long-term high inflation. She said there were recent signs major US retailers such as Walmart and Target had built up excess inventories, which they would need to clear by discounting.

“We are seeing these massive retailers, the best supply chain managers in the world, with inventories up 30 to 40 to 70 per cent year over year, as their sales are up only 3 per cent,” Wood said.

‘I think many people are looking now at the risks of not inflation going up, but inflation turning into deflation.’

Cathie Wood

“What I believe we are experiencing right now is a massive inventory cycle, and Target and Walmart are basically telling us, we are going to clear our shelves by cutting prices.

“So I think this idea that these supply chain and raw material prices are going to end up in long-term pricing – I think that’s coming under serious question right now. And I think many people are looking now at the risks of not inflation going up, but inflation turning into deflation.“