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Ahead of the Curve: Investors ignore big data at their peril

Valentijn van Nieuwenhuijzen says news platforms, blogs and social media offer a massive amount of data and emotions which can be crucial in making sound investment decisions

One of the innumerable impacts of the internet is the window it provides into the sentiments and beliefs of the world’s investors. The influence of what John Maynard Keynes termed “animal spirits” on markets has never been greater than in today’s rapidly changing world where opinions, emotions and information are increasingly shared instantaneously through digital networks that stretch across the globe. This rapid transmission of information adds to the ways in which investor emotions can exert influence on markets. If the resulting market swings create feedback loops strong enough to affect the ‘real’ economy, then self-fulfilling prophecies are created. 

The complex nature of markets demands that all available insights are exploited in order to understand the market organism and its interaction with its environment better than the rest of the investment community. None of us will ever fully comprehend how ‘Mr Market’ really thinks or moves but a better understanding of his digital footprint will certainly help us better assess his most probable path.

One of the latest additions to a fund manager’s toolkit is the analysis of news or ‘big data’ from digital channels. This creates the ability to objectively measure emotions, perceptions of uncertainty and political risk in a high frequency (daily) and timely manner. Ignoring the intelligence that can be gleaned from these digital channels would be a major oversight, if not perilous, in our view.

Doing this effectively means not only collecting digital newsflow data but also being able to identify where it comes from and understand what it means. Interpreting the data, appreciating the emotions it reflects and identifying any insights these opinions and emotions might actually provide on the future direction of markets are the key challenges to integrating this data into an investment decision-making process.

To assess the potential extent of market moves, especially in the context of risk events such as elections or central bank decisions, it is necessary to understand how investors are positioned and the likelihood of short-term reversals. Strong consensus overweight positions in certain assets or markets are often contrarian indicators and signals for caution.

Individual asset managers will give greater or lesser weight to big data analysis. The best approach is to base top-down multi-asset strategy on a combination of fundamental and behavioural analysis. Along with an assessment on macro and corporate fundamentals, this provides an understanding of investor emotions which is indispensable for maximising investment performance and making better-informed investment decisions.

The spectrum of emotions that can be distilled through digital channels is far broader than that of traditional binary (positive/negative) sentiment indicators. Such channels make it possible to decipher emotions along the dimensions of expectations, uncertainty or urgency. This type of information provides additional insight or hints on future market direction that can be derived from more ‘fundamental’ information on corporate earnings or other economic data. 

A good example of how this works in practice occurred in January 2016. The digital media analysis we received on a particular day showed an above-average number of articles on ‘stress’, ‘gloom’ and especially ‘conflict’. Even before the market collapsed it was possible for investors to cut their equity exposure and extend their cash positions. It turned out to be just in time: the world’s equity markets subsequently collapsed, with the S&P 500 equity index falling nearly 5% in the subsequent few days. 

Big data is an additional source of information rather than the only one. It should contribute perhaps 10-20% to final decisions. But there can be no doubt that in a world in which a rapidly increasing amount of information and emotions are shared through digital channels then it is essential to tap into the networks of financially-oriented news platforms, blogs and so-called social media to understand how the broad economic and financial mind-set is evolving. Furthermore, the continuous cycle of technological innovation means that asset managers will have to constantly develop their analysis toolkits and nurture an open-minded team culture if they are to stay on top of their game. 

Valentijn van Nieuwenhuijzen is head of strategy at NN Investment Partners

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