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Perspectives: Backing Innovation
733 Plays17 days ago
In the first episode of our Perspectives series, Cathie Wood, Founder, CEO and CIO at Ark Invest, joins David Liao, HSBC’s Co-CEO, Asia and the Middle East. In this wide-ranging and candid conversation, they discuss the innovation economy across China and the US as well as the platforms driving tech transformation.
Watch or listen to their discussion on investing in innovation in the world’s largest economies – from technology competitiveness, policy and market developments, through to emerging opportunities and entrepreneurial zeal.
This episode was recorded behind the scenes of HSBC’s Global Investment Summit in Hong Kong. Find out more here: https://www.gbm.hsbc.com/en-gb/campaigns/global-investment-summit
Disclaimer: Views of external guest speakers do not represent those of HSBC.
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Transcript
Introduction of Cathy Wood
00:00:14
Speaker
Hi, thank you for joining the podcast. I'm David Liao, co-CEO for Asia and Middle East for HSBC. And I'm super excited to have Cathy Wood, CEO and CIO for ARK Invest to join us today.
00:00:27
Speaker
My great pleasure. I'm very happy to be here with you, David. Thank you.
Motivation Behind ARK Invest
00:00:32
Speaker
Cathy, tell us about the story that, you know, of how the whole art came to be and the thesis and we can perhaps expand into the current affairs. Sure. actually in that I needed do something actually in two thousand twelve i knew that i needed to do something to at least do my little part to help transform our industry.
00:01:00
Speaker
And when I say that, that sounds like a very large task, and it is, and and will impact it only so much. But what had happened ah in the the previous years is, especially tech and telecom bust, and then even more so after 08, 09,
00:01:22
Speaker
I watched our markets going passive because a lot of people were just scared of equities, didn't want to take any risk, and felt that a passive strategy, just broad-based benchmarks, um would work fine for their asset allocation.
00:01:42
Speaker
And at the same time, I was looking at five major technology platforms that were evolving at the same time that we believe are going to transform the world completely.
00:01:55
Speaker
And what
Technological Evolution and Investment Diversification
00:01:56
Speaker
does that mean? It means that the traditional world order, as represented by broad-based benchmarks, could change dramatically. Now, I know many companies in those benchmarks will adapt, but but others won't. And i felt there was an unmet need out there for diversified exposure to innovation based on research that very few people are doing out there.
00:02:27
Speaker
And the reason the research I think has lessened over time is the move to passive. yeah And so ah felt we could contribute that way and then also contribute by introducing new technologies into our business.
00:02:45
Speaker
How do you feel about you know, perhaps the passive investing may not have been the best way to allocate resources. So you you use an analogy of rather than using a shotgun approach, you use a rifle approach to really stake into the growth.
00:03:02
Speaker
How does the fund manage, differentiate, balance that? It certainly could bring volatility. It certainly can bring a lot of excitement. So how does how do you bridge that into an investor proposition?
ARK's Five-Year Strategy Overview
00:03:16
Speaker
Yes. Well, the very first thing is we have a five-year investment time horizon. We're not investing for this quarter or next quarter. We're investing for the next five years ah because they we believe these technologies are, they they're ready for prime time.
00:03:32
Speaker
Almost all of them are ready for prime time. So we talk about robotics, energy storage, artificial intelligence, talk about ready for prime time, but very early, blockchain technology and multi-omic sequencing. And is five years long enough or too short? Is it an investor timeline that you're catering to? We've imposed it on ourselves because with this thought that if the market is not going to start discounting the scaling of this new technology,
00:04:04
Speaker
within five years. So the technology need not scale within the next five years. But if if if there's a new technology evolving very early days and we believe the market is is going to ah start discounting the scaling. And we've just been in an environment where the market discounts nothing. It's only looking at this quarter. yes So it's been a very rough environment for innovation and our style of investing.
00:04:37
Speaker
And as you say, very volatile. yeah But if we're right and these technologies are ready for prime time, I think the right thing to do is to you know, basically as we do with each of our investments, leg in gradually and let the quarter to quarter evidence dictate how much more rapidly we should move in.
00:05:02
Speaker
When I say quarter to quarter, ah we listen to all of the quarterly reports and we have callbacks with management and we'll be asking them questions about, okay, what is either impeding the growth or what could accelerate the growth here. We're very focused on that. So five year investment time horizon.
00:05:24
Speaker
Yes, there's volatility. I think there will be less volatility with time because these technologies are maturing. we will definitely touch on the the macro yeah and some of the world views that yeah you have to form the thesis of the soil to grow innovation. yes I think as distinct um as it is for the ARC fund, would you also say that the mindset and the type of investors are also slightly different from some of the other passive funds or international funds because as you described, you're certainly not offering a fixed income product. We are not. You're not. the texture of your investors seems to all
00:06:07
Speaker
kind of be quite resilient, they buy in into this this ah story, they do patiently sit for the long term. Would you would you feel that they're different? or Yes, and I'll give you a a sense why. Blockchain technology and cryptocurrencies Talk about the wild west, as we would say in the United States. I don't know if you would use the same expression. We use the wild east. The wild east.
00:06:31
Speaker
Talk about the wild east and west. Blockchain technology,
Volatility in Blockchain and Tesla's Stock Discussion
00:06:36
Speaker
hugely volatile. And yet anyone who stuck with Bitcoin, for example,
00:06:42
Speaker
has been very happy. So they've been willing to put up with the volatility because they actually believe this technology will work. It's a technology, it's a new asset class, it's a monetary system. There are all kinds of reasons to own it and people own it for different reasons, right?
00:07:02
Speaker
So that's been a very good training ground. Another one in our own case is Tesla. That has been a wild stock as well. But if we're right, first of all, the rewards have already been enormous.
00:07:17
Speaker
And yet if we're right, they've just begun because the robotaxi movement has really just begun and the humanoid robot movement has just begun. The part of the market that we're focused on is the most inefficiently priced part of the market.
00:07:35
Speaker
And so one of our core missions and values is education. Education of investors, of course, but also education. Anyone who wants to read our research to understand how their lives, their children's lives, their grandchildren lives are going to change because of technology.
00:07:52
Speaker
We want to offer that. And I think that also has added to our brand that we're not just all about making money on these portfolios, but we really are.
00:08:04
Speaker
very sincere in our effort to educate read our research. and anyone who wants to read our research And that that's really amazing because it almost feels so much more aligned as we run into innovation and new creation and that's new. And so when things are new, people don't know where to put things. And and that that almost you're starting a conversation on how Ark or how Cathy looks at it and then say, what do you think? And obviously they would think of a lot of things and and and that really encourages the discovery. Yes, they're participating in the discovery and investors love that. yeah They really do. They love being along for the ride and actually taking a point of view.
00:08:51
Speaker
We give our Tesla model away and you can adjust the variables that we think are important if you think we're wrong. and then you'll have your own price target. You'll have your own model. Yes. Yes.
00:09:02
Speaker
And so we're we're happy to do that. And I think it's going to help over time increase the efficiency of the markets when it
Open Source vs Closed Models
00:09:12
Speaker
comes to innovation. Right now, we think they're very inefficient.
00:09:15
Speaker
that resonates with a recent occurrence and obviously that's DeepSeek which came in rather small but extremely transparent about their their models, their research.
00:09:31
Speaker
almost on day one they democratized it, and they laid it bare and yeah open. For a while I had people coming to me in the first two or three weeks and saying, we've built something just like Deep Seek but better.
00:09:48
Speaker
And my response was, well, of course you would, because DeepSeek is offered to you to build upon it. And it's a truly open model. And, it you know, almost it resonates in terms of how you present your case and ah and democratize it and allow that to come through.
00:10:04
Speaker
Absolutely. And now, you know you had in the United States, Jensen Wong, CEO of Nvidia, Sam Altman, CEO of OpenAI saying, wow, that was a breakthrough algorithmically.
00:10:18
Speaker
Maybe they didn't do it altogether for $6 million. dollars But that almost doesn't matter. doesn't There might have been a ah lot of pre-training.
00:10:29
Speaker
But what mattered was the algorithm, the creativity. you know which I think shocked a lot of people in the United States and disarmed them and also brought back into this conversation the notion of open source.
00:10:45
Speaker
Now, we have done a study on open source ah versus closed models. And if you look at them, ah you'll find that the closed models are still the best.
00:10:57
Speaker
However, if you look at the performance, the slope of change of performance gains, open is moving faster.
00:11:07
Speaker
And the only really open model we had in the United States was meta platforms, Lama 3. um And we thought the world was starting to close.
00:11:20
Speaker
And then here's DeepSeek saying, Oh no, here's open source. And I think that's very healthy. I really do. i think both will coexist, you know, for for different reasons. Yes, different rhythms and there are different times. Exactly. And some models are better at one thing versus another. So so that's fine.
00:11:39
Speaker
But, you know, I learned about the open source movement way back with Linux and getting my head around that. And it was just like, no, that's a very good idea because what is this?
00:11:51
Speaker
It is all these developers from around the world developing to this ecosystem.
China's Innovation Landscape
00:11:56
Speaker
I trust the fact that we're speaking in Hong Kong, you you're voting with your feet. Yes, indeed. it would be good to touch on that before we move to Trump.
00:12:05
Speaker
We're not here just because of the deep seek moment. We're here, well, because of HSBC, very importantly. your're yourre You're blazing a trail. you know As a student of innovation and studying what is happening in China right now, we're astonished at what's happening from an innovation point of view.
00:12:23
Speaker
ah Before COVID, US pharmaceuticals and biotech companies in licensed 4% of their molecules from China. or no, it was 5%. Now it's 44%.
00:12:40
Speaker
And some of the biggest breakthroughs we're seeing in what we're calling the multiomics revolution, which is dna RNA proteins, so forth, are occurring in in China. in china And you know when I heard President Xi Jinping start using the phrase new productive forces,
00:13:01
Speaker
I began to think, okay, wait a minute. Is this the government basically saying, we want to encourage innovation, we want to be number one in innovation?
00:13:13
Speaker
Might be. When the government here puts out an objective, yes you know the entrepreneurial zeal of the people, takes over and they accomplish incredible things. So we're very focused on innovation. And I'll give you an ah an example of why China is so important in terms of um in terms of ah progress and in innovation.
00:13:39
Speaker
In the United States, of course, everyone knows Tesla. We talked about it earlier. And the prevailing wisdom when we picked up Tesla, we bought it in, well, practically when it went public, ah was that GM and Ford and Chrysler at the time had R&D budgets that ran circles around Tesla sales. There was no way Tesla was going to break through.
00:14:04
Speaker
Recently, and Ford have pulled away from EVs. Why? Well, their shareholders didn't like that the EVs are not profitable.
00:14:15
Speaker
Well, guess what? They're not going to be profitable unless you scale them. That's just not possible. So when they pulled back, we said, uh-oh, our models, which are all based on units, unit growth dynamics, with increasing units, costs come down with new technologies.
00:14:32
Speaker
We're saying, well, Tesla can't do this all alone. and And then we own BYD. And then we thought, aha, China is going to help Tesla make this happen. From your lens, yes what's the soil in China? Does that nurture innovation or do you feel it's you know it's the much more kind in the US. I think the, oh no, no, no. I think the DNA, the entrepreneurial DNA in China, and I noticed this in 94, when really things were just getting going in many ways, certainly in Shanghai, there was just one skyscraper, right? Yeah, yeah.
00:15:11
Speaker
But back then, I just saw the entrepreneurial zeal right away. So there's something from a DNA point of view. It's the people that is that you can't stop. people You cannot stop them.
00:15:22
Speaker
um I will say that I think common prosperity ah was a phrase. So the government was trying to get sorted out more access and and so forth into more of the population and at lower prices. And so that ah that wasn't about innovation.
00:15:43
Speaker
But new productive forces is about innovation. oh, by the way, I might say that technology does increase act access because costs naturally come down. yeah So it is fitting with common prosperity. It's just they weren't framing it that way.
00:15:59
Speaker
New productive forces is very clear directive from the government. Go for it. So going back to the China-US relationship, you almost spoke up by necessity that this innovative forces and the impact on pricing is ah conducive to how US continues to to grow by receiving receiving imports of deflation.
00:16:23
Speaker
Yes. how how How would President Trump sort of manage that, harness that while posturing tariffs and, you know, or other policies? Well, I have been struck that President Trump has ah been much more forceful when it's come to Canada and Mexico than China. I'm surprised by that, yes.
00:16:47
Speaker
I mean, we've been very surprised. Martin Wolf was saying the same. Yes, yes, we've been very surprised. ah Now, President Trump, he wants a strong economy. and a strong market.
00:16:59
Speaker
And with Elon Musk by him his side, I think that he's beginning to understand that we need the unit growth dynamics if we are going to, innovation is going to flourish globally.
00:17:16
Speaker
And the U.S. has been leading an innovation over the years. I actually think China and U.S.
Future Collaboration Between US and China
00:17:24
Speaker
will be doing this together. Now, maybe that's wishful thinking on my part. But, you know, when I we know that Elon Musk understands this, he's very dependent on China. Right.
00:17:34
Speaker
And he's seen how important the unit dynamics in China have moved Tesla ahead. Yes. Right? um Could we be in another Nixon in China moment?
00:17:47
Speaker
Could we be? because Because people do trust Trump in terms of negotiating. Yes. wow And so and ah he'll drive hard negotiations, but that's the name of the game. You know, try and get the best deal.
00:18:02
Speaker
Each side will vie for the best deal. And then you come to an understanding. We talked a lot about China and the U.S. innovation, creativity in the rest of the world? What are you seeing? What is catching attention? What I think is important about this moment is the cost of innovation is collapsing.
00:18:22
Speaker
you know The first stage of the collapse started with the cloud.
Declining Costs in Innovation
00:18:25
Speaker
Yes. Right? that that democratize to a certain extent innovation. Now with ai training costs dropping 75% per year, AI inference costs dropping 85% too, thank you DeepSeek, 95% per year. Accelerating, yes. yeah and I think that innovation, i get the question from Europe all the time, why, what's wrong with us? Why can't we, and and I always say half the solution is understanding the problem.
00:18:57
Speaker
Why is this? Well, you don't have deep capital markets because you're not incentivizing in innovation. You are strangling innovation with regulation.
00:19:08
Speaker
and And we're hearing a little bit about regulatory clarity or taking down some rate. It'll take a long time because they have put in so many regulations, country by country and now EU, that it's going to take a while to work out. For them to bring unity, yes. They're asking the right questions. The UK has pulled away from that. They may have a better shot. Because one question I have is on that basis, is the China model systematically sustainable? Because it's, you know, even at the two meetings, they are concerned about the involution and not offering the right margin as a system to allow room for R&D, which we may mean it gets expressed in perhaps the state, but it may get expressed in
00:19:57
Speaker
where behaviorally and people spend, however a transient that might be in in pockets and and draw economics from that perhaps to subsidize that world. How do you think? think, again, i'm i place a lot of importance on any words that your leadership places importance on common prosperity to us.
00:20:20
Speaker
the the The tagline there would have been, get your margins down, get these products and services out as far into the other provinces as you can. And that would be commoditization and would not leave a lot of room for That's right.
00:20:37
Speaker
I don't know. You'll know before I will, I'm sure. But if new productive forces is also a signal that, you know, the the profitability, the profit margin is part of why innovation is going to sustain and why China will rise to be one of the top. I already say think it is one It is certainly a topic, actually. Yes, yes. If you want to build ah this idea of innovation and and healthy competition between China and the U.S., I think that would be a win-win.
00:21:13
Speaker
And offers a margin offer for R&D. And d for r and d it doesn't would that be inflationary? Not at all, because technology is deflationary. So it it would well compensate by the a ability to scale. Yes, yes, yes. Technology is inherently deflationary.
00:21:30
Speaker
And so you get the but best of both worlds. So it's um the margin is almost the fuel. It's the fuel and the promise cool and and it's what they turn around and do with the margin. you know Productivity increases are caused by all of these new technologies. You can turn it around in a number of ways.
00:21:46
Speaker
ah More R&D. ah But maybe not if price if you if you're forced to change it into lower prices. so But Morandi, lower prices, higher margins,
00:21:59
Speaker
or or more compensation. So those are the four uses. That's interesting. That's big topic for China as well. It's a big topic, yes. Well, and that's a competitive advantage China has. Your compensation schemes here are so much lower.
00:22:15
Speaker
it it It does need in the US, in order to compete with China, we have to get so much more productive, right?
00:22:26
Speaker
So much more productive that we can do what we're doing with fewer people yeah because of the compensation differentials. How do we resolve that? you you know For China, where you have a systematically kind of suppressed sort of wages almost you know a large state part of the economy. What would be your sequential advice to resolve that. Yeah. um Again and i think if China is innovating as aggressively as we believe they are it does seem to be the case.
00:23:01
Speaker
ah the productivity gains coming out of that are going to be enormous, especially if the U.S. is working on the same same sorts of technologies.
00:23:13
Speaker
And if they can turn that productivity increase ah ah into more wage gains, ah That's a win-win from an economic point. Then you bring the consumer back. Feeds into consumption, yes. Yes, which and you this economy, as I've analyzed the macros, still way too dependent on fixed investment relative to consumption. so you could So I think we'll each use that productivity increase differently. Last question, yeah going back to where you felt
00:23:46
Speaker
was where did the fear come from from the US? Why don't we explore the 37 trillion debt problem? How would technology and innovation solve that? So this is really a throwback to the early days of my career with Ronald Reagan.
Growth Through Innovation and Economic Strategy
00:24:04
Speaker
Ronald Reagan, ah because we had back-to-back recessions, he was jacking up defense spending, so the deficit went wild. We went to 5.5% of GDP.
00:24:18
Speaker
And this was the topic of the day. Today we're at nearly 8% of GDP, not in a recession either, but in a recovery. So that's a real indictment of what has happened, and not just the last four years, but many presidents.
00:24:32
Speaker
um The way we got out of the Ronald Reagan deficit problem was growth. It was more through growth than cutting spending or increasing taxes.
00:24:48
Speaker
Increasing taxes doesn't work. It just doesn't. People find way around yes Right, or the economy slows down. Government spending cutbacks, we absolutely, this is the first recession in 30 years for for the government.
00:25:03
Speaker
And it, you know, in 30 years, a lot of inefficiencies can build up. I mean, many. And they're going after them, and that's great. But it's not going to work alone. ah The way to get out of this problem is to grow rapidly. And if we're right,
00:25:19
Speaker
Thanks to these five platforms, five innovation platforms, which involve 14 or 15 different technologies, including reusable rockets, for example, just to give an example of another technology.
Predictions for Global GDP Growth
00:25:32
Speaker
If we're right, these technologies are going to lead to an acceleration in real GDP growth globally. and And the last time we had multiple innovation platforms evolving at the same time was late 1800s, early 1900s. Telephone, electricity, internal combustion engine.
00:25:54
Speaker
Real growth went from 0.6% where it had been for years. to 3% for the last 125 years.
00:26:05
Speaker
With these new technologies, these are five, not three platforms, and they involve many more technologies. We think during the next five years, real GDP growth globally will go into the 7% range. Most people think this is crazy.
00:26:23
Speaker
But the other side of that is potential deflation, which would take nominal GDP into that 5%, 6% range. Not much different from where it is right now, but very healthy and very positive for the equity markets from a valuation point of view.
00:26:40
Speaker
in that incredibly hopeful note by looking to the past in order to have a glimpse of the future. Cathy, thank you so much for this time. Looking forward to having this podcast version two again when you're next time here.
00:26:56
Speaker
We spoke of ideas about bringing these innovation and creativity dialogues here in Hong Kong. We're super looking forward to that. ah Thank you, Cathy. It's been my pleasure and thank you. Thank you very much.