Strategy Note / Global

Active investing in EM equity after Covid-19: A final chance against passive

  • Outperformance of large EM index weights, China and Korea-Taiwan tech, in the Covid-19 crisis suits passive funds
  • But China disruption from economic fallout and worsening US relations might be a final chance for active funds to shine
  • Failure to reach critical mass, not passives, is the problem in FM. More of a private equity-type mandate is needed

As part of our look at the consequences of Covid-19, we focus here on institutional fund management in emerging market equities. Our view is that the disruption and dislocation of markets and business models may offer a last chance for active management in Emerging Markets, against the growing passive onslaught. For Frontier, the index may already be broken, and mandates which look more like private equity may be needed

Passive funds have been winning share from active funds for many years. In developed markets they now account for over half of the asset class. Drivers of this include lower fees, more sophisticated versions of passive (thematic passive funds), steadily rising markets, and the underperformance of the average actively managed fund.

And the rise of passive funds has made outperformance of actively-managed, bottom-up, fundamentally driven asset allocation more challenging, because the weight of passive flows – particularly when prompted by index changes – can overwhelm specific company or country investment cases and, all other things equal in a rising market and within a steady drop of inflows, the performance of passive funds can become somewhat self-fulfilling.

The vulnerability of passive funds should be greatest when there are major shifts in the backdrop of the market; breaks in the fundamental trends which have supported the largest components of an index. Passive funds have no defence against this, almost by design. 

Furthermore, the damage in performance can act as a reminder of the need to think longer-term, in terms of wealth creation; ie closer to the sort of time frame needed by successful, fundamentally-driven managers to achieve outperformance on the basis of a repeatable investment process.

So far the outperformance of China and Korea-Taiwan tech suggest passives will march on in EM

China and Korea-Taiwan Technology drive the majority of the weight in the EM equity index and EM traded value (liquidity). They also happen to be among the beneficiaries of China’s rapid emergence from Covid-19 disruption, the accelerated adoption of new technology across a range of services, and the gravitation of liquidity further into these dominant parts of EM during the current crisis. This should reinforce the outperformance of these largest index weights: all other things equal, this would suit passive fund strategies. 

Brazil, India, South Africa and Russia were already small relative to these markets and the likes of Saudi and Thailand were already too small to sway the performance of mainstream EM funds. The tail of irrelevant emerging equity markets (but sizeable countries and economies) for those benchmarked to the EM index has grown very long indeed.

But what if China on the cusp of one those major shifts to which passive strategies cannot easily respond?

However, we are sceptical that China can so easily recover (we find it incredible that infections, on official data, flatlined so early) and think that social distancing will reappear, that the shock to export demand has been felt fully, and that there will be lasting ripples in, for example, the shadow lending system, from the economic sudden stop. If this proves to be the case then this would equate to one of those periods when actively managed funds, positioned for this change in consensus view, could substantially outperform the passive comparators. 

Furthermore, the increasingly intense cold war between the US and China may present mainstream EM funds (both active and passive) with questions they have not faced before: will the weaponization of diplomatic, technology, territorial, and trade tools used by both sides in this cold war extend to capital markets and does that mean that, at some stage, there is a material risk that Chinese equities are deemed offside by US regulators? If so, that is not a question that passive strategies can easily take a view on in advance.

The challenge in Frontier and small EM has not been passives so much as failure to scale to critical mass

In Frontier Markets, the passive threat is much less advanced and should be much easier for active fund managers to defend against. A long list of factors suggest that actively managed strategies should outperform passive in small EM-FM: 

  1. Large swings in the country weights in indices such as MSCI FEM and MSCI FM (usually when a country is upgraded to EM) which drive disproportionate flows in and out of the stocks in those countries well in advance of the day those changes take effect.
  2. The loss of otherwise attractive investment cases at the stock level when that stock is removed from the index (eg as part of a country upgrade to EM).
  3. The high representation in indices of relatively mature companies or state-owned enterprises (which often do not have the most compelling investment cases).
  4. The extreme diversity of the investable universe (multiple geographies, languages, FX regimes, regulatory structures).
  5. High all-in trading costs (including commission, FX conversion, custodian, structured product access charges), and (vi) generally low trading liquidity (which inhibits the ability to easily trade in and out of stocks).

The biggest challenge for the small EM and FM asset class is that it has not yet reached a critical scale where asset allocators, as a whole, have to consider it and are drawn to individual funds by performance relative to a benchmark or peers alone. Instead the fate of a small EM and FM equity manager is perhaps much tougher; they need to substantially outperform DM and large EM and, ideally in more normalised environments, deliver positive absolute returns in US$ terms (regardless of DM and large EM performance).

FM may have to redefine itself as a quasi-private equity asset class, with much longer-lock up periods and the ability to invest in local currency and US$ sovereign bonds as well as public equity.

In the interim, small EM and FM equity markets likely return to being an almost entirely locally driven market where the catalyst for re-rating comes not, as it might have done in the past decade, from foreign investors but, rather, from local investors attracted to local equities when valuations relative to local bond yields and bank deposit rates become attractive.

Of course, for any small EM and FM fund able to withstand this crisis, the fruits of perseverance could be unrivalled; valuations are arguably attractive across the board (given the mainly strong balance sheets in every country’s bellwethers) and structural reform and growth themes should ultimately reassert. 

You can read more about how Covid-19 is reshaping the world in our recently published report Waiting on the World to Change, in which we explore how the current crisis will result in new normals for politics, macroeconomics, business models, and finance.


Related reading

China and EM Tech valuation discount vs DM narrows ytd; not so for small EM-FM

Frontier-Emerging strategy: Benchmark, identity and confidence crises

7 reasons to consider investing in small EM and Frontier

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Strategy Note / Global

Business models after Covid-19: Accelerating the next industrial revolution

  • A wholesale relocation of supply chains is impractical and unlikely
  • The adoption of new technology in services will accelerate, hastening decline of “analogue” services
  • Tourism and travel: leisure may survive better than business travel, emerging markets better than developed
Hasnain Malik @
Tellimer Research
16 April 2020

In our latest look at the impact of the economic shock brought on by Covid-19, we focus on business models. We think the adoption of automation in manufacturing will accelerate, and stockpiling for corporate and national security purposes will be given greater priority, but a wholesale relocation of supply chains is impractical and unlikely.

There are several reasons why wholesale relocation of manufacturing away from China or full repatriation on an entire vertical chain of manufacturing back to home markets, even ones the size of the US, are unlikely.

  • While reliance on manufacturing located in China has exposed a vulnerability in all supply chains, the relocation of that manufacturing back to a home country large enough to potentially host it (eg the US) would not any better guarantee the availability of product during a truly global pandemic.
  • The diversification of production away from China was already underway (hence the growth in manufacturing across South Asian countries like Vietnam and Bangladesh, and, even, in East Africa in recent years) – it is just that this was being driven mainly by cheaper labour, efficient enough infrastructure, and, more recently, more favourable export tariffs.
  • Many richer countries may no longer have the environmental appetite, or economically viable supply of intermediary inputs in sufficient quantities to support the complete repatriation of manufacturing – this could apply to the UK as much as it does to Qatar.
  • Some countries, both developed and emerging, may be too small – in terms of population, space, and financial capital – to establish manufacturing on a scale to shift away from dependence on China.
  • The shift of a complete vertical manufacturing supply chain means that raw materials and intermediate inputs are required, as well as assembly, and this compounds all the factors listed above.
  • Unless the world shifts entirely to a state-driven model of production, then privately-owned companies will remain the owners of manufacturing production. Private companies will continue to maximise shareholder return and likely resist the relocation of manufacturing unless the state completely skews regulation (through business licencing, tax regimes, and subsidies) and forces more expensive product onto its population of consumers.
  • Self-sufficiency in manufacturing is an illusion. Just ask those who crafted the Saudi national strategy in the 1970s to establish food security, of which self-sufficiency, enabled by the deployment of technical exports and huge fiscal resources, was one component. This ended up delivering, by the 1990s, too much overpriced wheat, for example, and a massive depletion of water resources. Saudi ultimately shifted to a strategy of purchases of overseas land spanning, for example, Australia, the Philippines, South Africa, the US, and Argentina).
  • As a way of repatriating manufacturing (of potentially anything, apart from food), the adoption of 3D-printing may alleviate some of these challenges (eg supply of labour, some raw materials and intermediary inputs) but only where 3D-printed products are durable enough (and we are still very early in the evolution of 3D-printed products for the mass market) and only for countries with sufficient indigenous supply of electric power and petrochemicals.


Figure 1: Global manufacturing share – China is 28%

UN, Tellimer Research

The adoption of automation in manufacturing will accelerate but within limits

While entire manufacturing chains are unlikely to relocate, within existing manufacturing facilities the embrace of automation technologies is likely to occur more rapidly.

Still, there are obvious limits to this: individual companies will only adopt automation when the probability-weighted costs of human indisposal (eg in the event of an epidemic) outweigh the present value of the fixed costs of new machinery, and there are some manufacturing processes involving human input that automation is still a long way from solving (eg manipulating and twisting fabric for stitching complex garments).


Figure 2: Industrial robot installations

Source: International Federation of Robotics, Tellimer Research

Figure 3: Robot density

Source: IFR, Tellimer Research

Figure 4: Installations of robots by industry (2018)

Source: IFR, Tellimer Research


Stockpiling for corporate and national security purposes will increase

While the complete repatriation of manufacturing is not feasible, greater stockpiling – for both corporate inventory risk management and, for essential items, government security risk management – is inevitable. The end result is higher cost for consumers.

The adoption of new technology in services will accelerate, as will the decline of “analogue” services (e.g. traditional retail, banking)

It is an almost universally consensus view, reflected in the outperformance of technology, and in some cases, telecom, equities throughout the crisis, that the delivery of services based on human capital and, traditionally, physical meetings, will shift even more rapidly than it already was to internet-based platforms: eg healthcare, retail, education, finance, and entertainment. In emerging markets, the most widespread instance of this is in the more rapid adoption of online payments and transfers.

While technology companies benefit, with perhaps a few years’ worth of technology adoption gains within the space of a few months, traditional retail, advertising, entertainment (sports, music), real estate companies and banks exposed to increasingly stranded retail and commercial assets suffer.

A few caveats that should be mentioned in this regard:

  • After such a prolonged period of social isolation there may be a backlash in favour of a return to the “bricks and mortar”, face-to-face, analogue, “real-life” version of all these services. At the extreme, for white collar workers, dressing up and working from the office might become every bit as much of a privilege as dressing down and working from home once was.
  • Technology’s gain should not always be mistaken for gains for the entire “sharing business model” and “gig worker” economy. The owner of the underlying asset might maximise utilisation in good economic times but in bad times they may be every bit as exposed to the fixed costs associated with that asset. Furthermore, this crisis has brought home one truth for asset owners in the sharing business model: the flexibility so cherished by home or car owners, or gig workers, in good times has been matched with the horror of near zero protection of income in a downturn.
  • The unexpected windfall of technology application users likely, in the short-term, does not drive higher revenues for technology companies, because most of them will be under, at least, soft pressure from governments not to charge fees for services (and may have been encouraged to cut fees to existing users) which have become mission-critical for most of an economy in lock-down. Whether these technology application companies will be able to start charging once the crisis passes (i.e. will governments interfere, or consumers resist), or will increasingly adopt revenue models based on mining user data for third-party advertisers, remains to be seen.
  • The unexpected windfall of users may also expose architectural flaws in a technology, particularly in terms of scalability, security and privacy. The highest profile example is, perhaps, Zoom Video Communications, which has seen a 20-fold increase in daily online meeting participants to c200m in the first quarter of 2020 but has also admitted to inadequate security defences against hackers and exploiters of private data. Precedents in the technology industry suggest that corporates and governments are more sensitive to data insecurity than consumers (who appear to place greater value on utility of the application than loss of privacy).


Figure 5: Price performance of tech-telco bellwethers

Source: Bloomberg, Tellimer Research

Tourism and travel: leisure may survive better than business travel, emerging markets better than developed

The shift of commercial meetings to online virtual meetings likely persists: the resulting cost savings will become embedded. However, for leisure travel the post-crisis outlook is not so clear cut. For potential international tourists at every income level, the liberation from many months of quasi-quarantine may act as a catalyst for a resumption of travel; a ticking off of items on the bucket list at a much earlier age than is usual.

Greater restrictions and higher costs (visas and health screening in advance, more expensive airfares and hotels after the closure of the financially weakest) may reduce value across the industry until sufficient supply exits. In markets with more informal and flexible labour, the tourism industry may survive in better shape than in those markets with highly restrictive labour. All other things equal, that might point to relatively brighter prospects in the emerging markets and the US, compared to, for example, the EU.

Figure 6: Travel and tourism direct contribution to GDP (2020f, %)

Source: WTTC, WB, Tellimer Research


You can read more on how Covid-19 is reshaping the world in our recently published report Waiting on the World to Change, in which we explore how the current crisis will result in new normals for politics, macroeconomics, business models, and finance.

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Macro Analysis / Hong Kong

How has COVID-19 changed the Hong Kong fund industry?

Refinitiv Perspectives
29 May 2020

The Hong Kong Investment Management 2020: A Dynamic and Competitive World webinar assessed the impact of COVID-19 on the Hong Kong fund industry and in broader global markets. Speakers focused on three particular areas: Asset prices and stock markets; the growth of Environmental, Social, and Governance (ESG) funds; and how data innovation is impacting active and passive funds.

  1. Assessing the impact of COVID-19 on the Hong Kong fund industry, speakers at the webinar agreed that in spite of the plunge in stock market prices, equities remain expensive. They agreed that a new strategy is required for this environment of “muted growth”.
  2. ESG funds continue to grow; attracting $46 billion globally in Q1. However, with no single standard practice to integrating ESG investment process, fund managers must devise their own approach.
  3. In this new environment, webinar attendees said they believe innovative use of data will drive alpha in active and passive funds. But most crucial will be the skill of the fund manager to create a balanced portfolio between active and passive.

Reeling from the uncertainties of the U.S.-China trade conflict and unprecedented levels of social unrest, 2019 was a testing year for the Hong Kong economy. According to Xav Feng, Director, Lipper Asia Pacific Research, Refinitiv, the territory’s economy shrank during Q4 by 2.9 percent on an annual basis, ensuring that real GDP for the entire 12 months contracted by 1.2 percent.

The unexpected COVID-19 pandemic has since made matters worse.

Listen to Hong Kong Investment Management 2020: A Dynamic and Competitive World

COVID-19’s impact on Hong Kong

By mid-March, the COVID-19 pandemic had triggered a financial crisis. Stock markets globally tanked by an average of 30 percent — the Hang Seng Index fell by around 20 percent, from 28,843 at the start of the year to 22,805 on 3 March.

On 16 March, in a bid to reduce the pandemic’s financial impact, the Hong Kong Monetary Authority lowered its base rate from 1.5 percent to 0.86 percent, and the Hong Kong Government pumped US$137.5 billion into the economy.

To the surprise of some, these measures worked, with major indices settling at between 70 percent and 90 percent of their value year-to-date.

Equity valuations year-to-date. How has COVID-19 changed the Hong Kong fund industry?

In terms of valuations, however, stock prices remained comparatively high.

A poll conducted at the Refinitiv webinar Hong Kong Investment Management 2020: A Dynamic and Competitive World, revealed that two-thirds of attendees believed that equities were “still expensive”.

What's your view on global equities. How has COVID-19 changed the Hong Kong fund industry?

Speaking at the webinar, David Wong, Senior Investment Strategist and Head, Asia Business Development, Equities at AllianceBernstein, said: “When you think about whether or not an asset is expensive, you have to ask the question: In relation to what?

“When you own a stock, you own not just this year’s earnings but all future earnings. This year’s earnings are just a small percentage of the company that you are buying.”

Government and central bank policies are also propping up equity prices, said Thomas Poullaouec, Head of Multi-Asset Solutions APAC at T. Rowe Price.

However, with large cap stocks outperforming small cap stocks by 15 percentage points, and with growth outperforming value by the same margin, investors are positioning their portfolios with the expectation of low growth and a muted recovery.

“This is the new normal,” Poullaouec said, “where managers must adjust their strategies to suit today’s novel investment environment.”

Watch: Refinitiv Lipper Fund Awards

ESG funds grow in Q1

Despite the market sell-off, ESG funds attracted almost US$46 billion globally during Q1 2020 — inflows in Asia ex-Japan amounted to US$900 million. While this figure may seem impressive, the region’s share stands at just 2 percent.

Deepak Khurana, Performance Director for Fund Ratings and Distribution, APAC at Refinitiv, said that while interest in the style of investing is growing, there remains no single agreed-upon best practice on how to integrate ESG factors into the investment process.

Global estimated net flows ESG funds – asset type. How has COVID-19 changed the Hong Kong fund industry?

Asset managers are implementing ESG analysis into their investment process as per the resources available to them, corporate reporting on ESG issues, and investor demand.

Asia continues to have limited penetration and needs to go through the learning process of building sustained performance backed by a robust framework to bring ESG into the mainstream investment decision-making process.

A second poll at the webinar found that limited disclosures by corporates was a key challenge faced by investors when incorporating ESG factors into the investment decision-making process.

Pooja Daftary, Research Analyst at MFS Investment Management, outlined further issues the industry faces.

She said that ESG ratings and scores are insufficient in driving investment decisions; regulations emerging in some jurisdictions are encouraging a top-down approach to investing; and that there is no one-size-fits-all way to assess the ESG activities of companies from different countries.

The solution, she said, is to have an investment process that relies on fundamental research and a formed opinion on an individual security, while maintaining active ownership through proxy voting and engagement.

This approach, she added, further integrates all material factors — such as a company’s environmental policy, worker health and safety, remuneration and stakeholder engagement — into the investment decision-making process.

Watch: Refinitiv Perspectives LIVE — ESG Investment, a cure all for Asset Management?

Data and driving alpha

Data standardization is a challenge to ESG investing. Typically, Corporate Social Responsibility (CSR) activities are confused with ESG adherence. Daftary said: “We need hard data such as performance targets and KPIs that can be measured.”

Data is also enabling the fund industry to make swift and highly informed stock purchases. AllianceBernstein recently leveraged big data analytics to identify a buying opportunity in a car insurer, as vehicle accident claims in the U.S. dropped 90 percent during the lockdown.

Global assets under management — active and passive

Active vs passive investing

Whether a fund is actively managed or passively managed, data is part of this new normal and is a critical element in driving alpha. In a third poll conducted at the webinar, 40 percent of attendees agreed that passive funds will become a meaningful product category in the Hong Kong fund industry, with 22 percent believing they will overtake active funds.

What are the prospects of passive funds

The current active versus passive argument is subjective, said Poullaouec, and down to the skill of the investment manager. It not one versus the other, but rather how they will both feature in a balanced portfolio, he added.

Listen to Hong Kong Investment Management 2020: A Dynamic and Competitive World

The post How has COVID-19 changed the Hong Kong fund industry? appeared first on Refinitiv Perspectives.

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Macro Analysis / Global

Trading data and tools after COVID-19

Refinitiv Perspectives
26 June 2020

COVID-19 volatility has caused huge disruption in global markets, and has been the catalyst for traders to move towards actively managed investing. How will the trading data and tools employed during the crisis help traders to continue managing risk, compliance, and spotting new investment opportunities afterwards?

  1. The deep impact of COVID-19 on global markets has caused the trading environment to move into a new era that is dominated by price-driven trading.
  2. The agility and flexibility of actively managed investing is now better equipped to deal with the market volatility, shifting trading away from being primarily passive investing.
  3. Once the COVID-19 pandemic has subsided, how will access to appropriate trading data and tools continue to help traders to respond to investment opportunities?

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The impact of the COVID-19 pandemic on financial markets has left many traders feeling like they are flying blind.

They are dealing with high levels of market volatility and evaporating liquidity, resulting in record volumes of trading. Even with some hints of improvement, no one really knows how long this crisis mode will last.

But it does signal a new era dominated by price-driven trading.

From passive to active trading

It’s a traders’ market.

There are lots of opportunities to trade not just on fundamentals but also on price. As a result, we’ve seen trading move away from primarily passive investments to more actively managed funds.

The reason: The agility and flexibility of active management is more equipped to handle market volatility and give traders an edge.

This traders’ market is characterized by a shortened holding horizon, for example, when a stock falls 60 percent and then afterwards bounces 35 percent. It allows an active trader to get in and out of a stock multiple times in the span of a few days or weeks, rather than relying on mid- to long-term projections and fundamentals to decide whether to trade long or short.

It’s important to buy and sell what’s right — right now. This means having the appropriate data and tools to respond when the opportunity arises.

How can trading data and tools help?

Because of the volatility, our clients saw more than double the usual trading over our Refinitiv REDI EMS platform in March, at the peak of the crisis.

The ease with which traders were able to manage risk, compliance and new opportunities in the disrupted environment signals a new era. So, even when the world gets back to their offices, it’s likely that many of these shifts will become the norm.

Here are the new ways of working that will likely stick around:

Remote trading
Timing will remain key. And with how traders are able to invest, the flexibility offered by cloud-based platforms like Refinitiv AlphaDesk and REDI EMS mean that it doesn’t really matter if you’re home or at the office.

Traders can leverage a range of workflow solutions and execution tools to access liquidity and execute a large number of trades in smarter ways.

The information you need is there — when you need it, from wherever you are.

Portfolio management
Since Refinitiv acquired AlphaDesk, we now have an end-to-end solution that will carry you from trade inception to execution with data and automation easily accessible in a single place.

REDI EMS provides real-time information, access to powerful electronic trading tools and quick access to the market so you can trade multiple stocks at once.

Not only are you able to mitigate risk, but you can also take advantage of price distortions and stay an active trader.

Data and analytics
Reliable data and the right integration are key to help make quick trading decisions.

Recently, we worked with Joel Sebold from our Refinitiv Labs team. We analyzed price behavior and depth of LOB (Limit Order Book), for a near month E-mini future contract, comparing January (pre-volatility spike) and March (mid-volatility spike).

The Density, Mean Spread and Trading Aggressiveness comparison between January and March all point to a market that moved from tight and dense, to wide and illiquid in a very drastic manner.

This, combined with significant increase in trading volumes, resulted in very large intraday price swings.

These data points could be very valuable to a trader or portfolio manager looking to assess current liquidity conditions which drive price impact.

With our analytics and Labs team, we are constantly looking at new ways to display and distribute analytics to improve the trader’s experience, with the buy-side trader in mind.

Multi-asset capabilities
In many cases, active managers can also switch investments around different asset classes.

The COVID-19 pandemic has seen moves on all asset classes, all at once, and the ability to reallocate funds from one asset to another could certainly have helped mitigate risk or make winning trades.

We believe the trader of the future will trade all asset classes, and we are building our buy-side trading systems to solve that need.

End-to-end workflows
An end-to-end workflow allows traders to trade smarter and faster with REDI EMS.

With direct links to portfolios, profit and loss statements, and risk and compliance systems, it is a robust investment solution that caters to both long-term investors and active traders.

This versatility and scalability are crucial, especially in times of volatility, and should help drive buyers’ decisions in the future.

Watch — The Future of Trading: People and Machines

The tools to capture the big deal

In this environment, there are specific opportunities. But they don’t necessarily last very long.

Traders and investment managers need the right information to act fast. That means having automated tools to alert you at just the right moment so you don’t miss out on the opportunity to capture that big deal.

Execute trades confidently with our multi-asset trading solutions covering pre- to post-trade workflows with comprehensive real-time data, efficient execution and reliable post-trade service

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Refinitiv, or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

© Refinitiv 2020. All Rights Reserved.

REDI Global Technologies LLC is a member of FINRA/SIPC. REDI Technologies Ltd. is authorized and regulated by the UK Financial Conduct Authority. This communication is only intended for institutional customers and eligible counterparties as defined by the respective regulators/authorities. REDI services and related services are not available in all jurisdictions.

The post Trading data and tools after COVID-19 appeared first on Refinitiv Perspectives.

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Macro Analysis / Asia

How can alternative data predict a COVID-19 recovery?

Refinitiv Perspectives
3 June 2020

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.

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.

Household debt levels as a proportion of GDP (U.S. and China, 2005-2019). Using news and data to predict a COVID-19 recovery
Household debt levels as a proportion of GDP and income, China and the US, 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.

Corona confidence: Recovering vs sick. Using news and data to predict a COVID-19 recovery


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.”

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The post How can alternative data predict a COVID-19 recovery? appeared first on Refinitiv Perspectives.

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Macro Analysis / Global

Effects of Covid-19 on the banking sector: the market's assessment

Bank for International Settlements
7 May 2020
Banks' performance on equity and debt markets since the Covid-19 outbreak has been on a par with that experienced after the collapse of Lehman Brothers in 2008. During the initial phase, the market sell-off swept over all banks, which underperformed significantly relative to other sectors. Still, markets showed some differentiation by bank nationality, and credit default swap (CDS) spreads rose the most for those banks that had entered the crisis with the highest level of credit risk. The subsequent stabilisation, brought about by forceful policy measures since mid-March, has favoured banks with higher profitability and healthier balance sheets. Less profitable banks saw their long-term rating outlooks revised to negative. And the CDS spreads of the riskiest banks continued increasing even through the stabilisation phase.

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