Alternative Data Takes Centre Stage
Author: Kevin McCreadie
May 8, 2020
AGF’s CEO and Chief Investment Officer discusses the growing importance of alternative data and what to expect from an economy that will be forever changed.
I’ve heard you use a baseball analogy to describe market cycles in the past. When it comes to the current crisis, what inning are we in?
I would say the middle innings. Think of when you go to a baseball game. There’s always a lot of energy in the park at the start of the game and people are riding their emotions. But once you get to the third or fourth inning, the atmosphere starts to settle down and it becomes a bit of a waiting game to see how it all plays out. That’s kind of where we are with markets. Investors have gone through the emotional rollercoaster of a deep selloff and strong rebound over the past couple of months and are now waiting to see how the re-start of the global economy plays out.
How do investors monitor the restart as more countries slowly open their economies again?
The short answer is to follow the data, but not just the data related to the virus or conventional economic data. These numbers are obviously important, but the dramatic spike in unemployment rates and historic decline in GDP growth figures for the immediate quarter are already assumed. And because there is still so much uncertainty about what’s ahead, economic forecasts for the third quarter may be less reliable than would be the case in a more predictable environment. That’s why I think there is going to be a growing reliance on alternative data to gauge in real time what’s happening as economies re-open. This is usually less structured than traditional data and is sorted and interpreted using computer algorithms. Our AGFiQ quantitative team, for example, has been analyzing earnings call transcripts using natural language processing to see what impact certain words—and how they are used—may have on the company’s stock price. But there are lots of other alternative data sets based on satellite imagery or social media patterns that can provide an equally important sense of current economic activity. This includes the amount of rush hour traffic there is now compared to before the pandemic, or the number of restaurant reservations being made or how full shopping centre parking lots are from day-to-day. All of it can provide valuable, near real-time insight into consumer behaviour as economies re-open in the coming weeks.
Do you expect this data to reveal the beginnings of an economy that is forever changed because of the pandemic?
I do. In fact, it’s a big part of why I believe this crisis may end up being more disruptive to the economy than any other market downturn I’ve experienced, including the Tech Wreck of the early 2000s and Great Financial Crisis in 2008-09. The virus and economic fallout that has followed from it is having a profound impact on so many aspects of our lives, including, most importantly, our health and well-being, and I don’t think that just goes away when the pandemic is behind us. The way we conduct business, form relationships, build communities and spend our money is going to be fundamentally different than it was before all of this began. But, while the economic and health toll of this pandemic is beyond horrible, I believe the disruption will result in a number of important advances in the long term.
What do these fundamental changes mean to investors?
At the very least, it should force us to re-assess many of the assumptions we hold about the economy and the consumer habits that help fuel it. For instance, the personal savings rate in the U.S. shot up to its third-highest level in March and I’ve have heard anecdotal evidence suggesting people who remain working now—but aren’t commuting to work or paying for daycare—are more focused on paying down their credit cards with the extra savings they have rather than in trying to find new ways of spending their disposable income. Of course, many other people are just trying to stay solvent through all of this, but, either way, it shows that consumer attitudes towards spending and the amount of debt they own may be changing. That would not only have ramifications for economic growth, but markets as well—especially if it leads to increases in retirement plan contributions and other investment accounts. And then, beyond that, it’s become clear over the past couple of months that some companies and/or industries and sectors have benefited more than others and may continue to do so in the future. Nowhere is this perhaps more evident than in the various technologies that have enabled work-from-home protocols and online education imperatives, while also providing important healthcare solutions and applications in the fight against the pandemic. If anything, this digital transformation is only getting started and innovations such as the public cloud, artificial intelligence and robotic automation will be important catalysts that drive the future economy forward and push equity markets higher.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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