Alternative Data: a way to improve investment decision-making
We live in a world that has increasingly become data-centric. The largest companies in the world, like Google, Facebook or Amazon have a business model based on aggregating, analyzing and monetizing their consumers and users data. As every sector in the economy endeavours a digital transformation, ever more data are generated, stored and available for analysis.
In the world of investment, the acceleration of the information flows has meaningfully changed the ability to derive return above the index. Nowadays, any information susceptible to affect a share price or market behavior is shared with all market participants in quasi-real time and is immediately analyzed by research analysts, traders and investors globally.
Furthermore, the regulated information released by a company or the economic data published by central banks or governments, come in discrete times. GDP number is available quarterly, the Purchasing Managers’ indexes are available based on monthly survey, corporate publish quarterly data. And these data has a laggard characteristic. They tend to be representative about the past – what has happened - rather than being representative about what is happening now or what could happen tomorrow.
In that context of the main macro and issuer-specific data being available widely and only on a discrete basis representing past data, many investors have pushed to identify more readily available data that represent current behavior in real or quasi real time. Some of the well-known correlations studied since the 70s relate to the relationship between electricity consumption and GDP per capita (for example https://link.springer.com/chapter/10.1007/978-3-319-47295-9_17). In a period of economic and market stress, and heightened uncertainty like today, as the Covid-19 epidemic evolves faster than the release of public data, such information becomes even more important.
Other data studied closely include credit and transaction data processed by fintech or credit card processors. Such data gives a quasi-real time view on the sentiment of consumers in each region, thereby providing an interesting light on the level of economic activity outside of the range of the reporting for official public data.
This kind of alternative data, relatively easily available, can be helpful for an investor trying to assess the dynamics of a market or an economy. Over the past decades, hedge funds and quantitative investors have invested heavily in technologies allowing to gather this information and assess correlations with and impacts on market and financial data. Slowly some of the most obvious correlation have become staples of investors’ behaviours. For example, the Purchasing Managers’ Index (PMI) released monthly giving an indication or the behaviours of large companies’ purchasing departments provides an interesting light on how companies spend money or not, thereby offering direct insight about the underlying economic dynamism of these companies.
As a private investor, accessing this data requires heavy investment and an ability to distinguish, within an overflowing sea of data, which one are useful or not. This is yet another way private banks can help. Relationship managers are used to curate the flow of data available and tailor it for the specific need of a client, by leveraging the bank’s infrastructure and expertise in accessing and understanding data. Furthermore, through access to the equity research team, investors can read the point of view of experts, like research analysts or economic experts, attuned with the usefulness of these alternative data and that can succinctly present the impact of a new datapoint. Economic and equity research often present non-financial datasets to support findings and views on the perspectives of a company for example.
We’re living in a world increasingly made of and dictated by data. However, the ability to manage intelligently the flow of data we are all exposed to on a daily basis is so massive that a systematic and intelligent analysis of the entire flow requires a dedicated infrastructure. Private banking clients benefit from this infrastructure and can therefore make better decision, aligned with their values ad their investment objectives.