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How can alternative data predict a COVID-19 recovery?

COVID-19 has plunged the global economy into a unique and profound crisis. And in the face of the unprecedented nature of these challenges, investors are also having to adapt to new working practices and employ innovative ways to analyze data. How can timely news and alternative data be employed to help predict the COVID-19 recovery?

  1. At the Refinitiv webinar The Impact of News and Data in a Fast-paced Market, speakers outlined the importance of timely news, such as measures of consumer confidence, and alternative data, for example a fall in PPI demand, in identifying market upswings. And Refinitiv/IPSOS consumer surveys suggest a COVID-19 recovery is already underway in some countries.
  2. COVID-19 has also seen vast numbers of people across the globe now working from home. The webinar found that 40 percent of attendees believe they are more productive in their new environment. However, 30 percent found the biggest challenge is the lack of personal contact.
  3. The webinar also addressed the impact of COVID-19 on ESG investing. Refinitiv Lipper data showed that 55 percent of ESG funds outperformed the market.

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The COVID-19 pandemic has created an unorthodox financial crisis. With global markets near-impossible to predict, novel data sets and the news are enabling investors to identify economic quality and momentum and the prospects for a COVID-19 recovery.

Speaking at The Impact of News and Data in a Fast-paced Market webinar, Pete Sweeney, Asia Economics Editor at Reuters Breakingviews, said: “It is premature to bet on a recovery before we understand the nature of the crash. The crisis developed extremely quickly, and much of its true economic impact has largely not yet been felt.”

Listen to The Impact of News and Data in a Fast-paced Market

Unique financial crisis

The ongoing financial crisis caused by the COVID-19 pandemic is unlike past fallouts. It is non-cyclical, and follows a decade of global synchronized growth propped up by central bank intervention.

Measures such as ultra-low interest rates and quantitative easing (QE) were effective, but only marginally. The outbreak provided an excuse many had longed for to reprice overvalued assets.

Datastream the world’s most comprehensive financial time series database. Use it to identify trends, generate and test hypotheses, and develop viewpoints and research

Unfortunately, the repricing of assets has been made complicated by today’s highly fragmented market. Since the global financial crisis (GFC), retail investors have had greater market access through exotic ETFs and virtual currencies, while China’s influence on the global economy has intensified.

In addition, global markets are now more convoluted due to structural and psychological changes that remain poorly understood.

Examples include the failure of QE to generate inflation, the resilience of equity prices to negative news, the reversal of globalization, and the widespread adoption of remote working.

What’s happening in China?

China’s response to counter the current economic fallout have been somewhat muted, especially when compared with its actions during the GFC. Back then, the nation pumped RMB 4 trillion (US$586bn) into the Chinese economy, which helped prop up trading partners around the world.

Sweeney believes that China’s present lack of action is due to its high ratio of non-performing loans, which is probably much higher than official data suggests. Other possible factors include unemployment, which is estimated to stand at about 20 percent, and surging household debt levels.

Chart showing household debt levels as a proportion of GDP and income in China and the U.S. between 2005-2019.

Alternative indicators for a COVID-19 recovery

Sweeney also pointed out that a fall in demand for personal protective equipment, remote working software, and disinfectant implies that the world could be returning to normal.

Further indicators could include decreased demand for gold, cryptocurrencies and other alternatives to cash and conventional securities — information that is disclosed in quarterly results and price indices, respectively.

Given many macroeconomic indicators such as GDP performance are released weeks or months after events take place, it can be challenging for investors to acquire the data they need to make timely decisions.

Callum Thomas, Head of Research at Topdown Charts, suggests the use of alternative data sets that are monitored in real time instead.

He said: “Investors should consider high-frequency indicators like Refinitiv/IPSOS consumer surveys, various PMIs, earnings revisions, and the relative performance of corona trades, such as airline, hotel and mall stocks versus those in e-commerce, e-sports and healthcare.”

Comparing the confidence of consumers living in countries where the COVID-19 recovery has begun with those in countries where the crisis is deepening exemplifies the effectiveness of alternative data.

In countries such as China, South Korea and France, where the worst of the pandemic has passed, consumer sentiment is once again on the rise, and confidence in the wider economy is already growing and prompting a market rebound. However, in places such as India, Brazil and Mexico, where the pandemic is worsening, such sentiment is in free fall.

Chart showing the level of confidence for the countries that are recovering from COVID-19 vs. the countries that are still sick from COVID-19.

Thomas holds the somewhat contrarian view that downturns are positive for investors: “If everyone is bearish, that’s bullish. And that’s a good thing because at some point, the story will change and they will get back on board.”

In a third poll, almost half of webinar attendees said their investment positions were defensive.

As an investor, how are you positioned? Using news and data to predict a COVID-19 recovery

Challenges of working from home

In a poll taken at the webinar, 40 percent of attendees said that they found working at home more productive than working in an office. While in a second poll, almost one-third said that they found the lack of personal contact a challenge.

Given these results, it is clear that such changes can have wide-ranging, complex effects, which in turn could impact the world and the global markets in unexpected ways.

The biggest challenge working from home poll results. Using news and data to predict a COVID-19 recovery

Watch: Refinitiv Economic Data, powered by Datastream

Is ESG outperforming the market?

With equity markets, on average, having lost about 20 percent of their value, there is some concern that the momentum driving ESG integration within portfolios will slow.

However, a study using Refinitiv Lipper data gathered between January 31 and March 31, 2020 — designed to compare the performance of around 34,300 funds against their respective technical indicator — found that 45 percent of conventional funds outperformed the market, versus about 55 percent of ESG funds.

Percentage of out- and underperforming equity funds by fund type. How can alternative data predict a COVID-19 recovery?

“Will ESG begin to wilt as the bull market slides?” asks Jamie Coombs, Head of Market Development, Investing and Advisory, ASEAN and Pacific at Refinitiv. “While it is important to note that our study was held over a limited time frame, it suggests that ESG is an integral part of prudent investing and a better choice for investors.”

Datastream the world’s most comprehensive financial time series database. Use it to identify trends, generate and test hypotheses, and develop viewpoints and research

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