FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY

How big data informs investment decisions
in China

SHARE VIA EMAIL SHARE VIA EMAIL

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

The analysis of big data from one of the world’s biggest markets is informing global investors in China.

Big data signals such as satellite imagery and footfall help build a view on publicly-traded stocks. This approach is especially helpful in China where investors have historically been fearful of inaccurate economic data.

Stocks are then ranked using models and analytics including artificial intelligence, and machine learning.

Deep analysis of big data together with a quant-based approach can offer investors differentiated and more consistent returns.

Capturing retail sentiment

China is the second largest equity market and the third largest bond market in the world, with retail investors making up more than 80% of total trading volumes for equities1.

Before the days of social media, blogs and online bulletin boards, it was difficult to determine what was driving the mood among retail investors.

Now their sentiment – such as concern over a company missing its earnings target or a surge of interest in a tech firm – can be tracked by collecting and aggregating huge volumes of online comments, using natural language processing tools.

Jeff Shen, Co-CIO of Active Equity and Co-head of Systematic Active Equity at BlackRock, describes this as big data meeting the big crowd.

Speaking at “The Impact of a Changing China” conference in London, he outlined how the latest techniques are being used to offer clients an insight into the thinking of millions of retail investors.

“That’s pretty valuable information,” says Shen, “because you can be the most rational, fundamentals-based investors in the world, but if even 5% of the volume is going the other way, it’s a pretty difficult environment to make money.”

A real-time snapshot of
the economy

Data and digitalisation do not replace old methods, but rather add to the offering, leaving clients better able to build a portfolio in an optimal way.

For example, to gain a real-time view of industrial activity in China, satellite technology can capture images of the metal frames that are built to house new factories, or factory extensions.

Computers then scan the images – which are taken every 30 minutes or so – and calculate a measure known as “metalness” and the movement of trucks to and from industrial sites can be analysed and aggregated in a similar fashion.

This compliments data that the Chinese government is putting out via independent sources and gives earlier readings rather than relying on quarterly valuations.

And it can also be used for micro as well as macro insights, comparing company A’s economic activity to that of company B.

By continuously monitoring such information, the returns and risks of each stock can be evaluated daily, providing an investment framework to deliver sustained alpha.

Assessing the crowd
not individuals

Using big data may ring alarm bells with some investors, especially within the UK and Europe, as new legislation is offering individuals greater protection around how their data is used.

There is also increased concern over the use – or potential misuse – of personal data in the US, after data collected from Facebook was used inappropriately for political purposes.

However, the data collected is not personally identifiable. In fact, any information on an individual is quite meaningless in this respect.

Furthermore, China is moving in the opposite direction to the West when it comes to the use of data. And people are willing and happy to share, according to Shen.

“Privacy is considered very differently in China … and I think the aggregate view is that the user of technology is actually quite open to share personal information and share a lot of data with their technology providers,” he explains.

Innovative technology guided by human insight

Jeff Shen and his team have been operating out of Silicon Valley for many years, using cutting-edge AI and machine learning. 

Big data is a hugely important tool for clients investing in China. But it does not operate in a silo and must be combined with traditional analysis of the market.

Shen uses the example of how ATMs have not replaced bank tellers, pointing out that there are now more bank tellers in the US than in the 1980s. Instead – the automation and digitisation has led to greater efficiencies, allowing the bank tellers to offer more value-added services, such as providing advice and guidance.

“Big data, coupled with human experience and economic intuition, can certainly give you a bit of a competitive edge,” says Shen.

The depth of information coming from China, together with an innovative quantitative approach to investing is well worth considering for those looking for a source of more consistent and differentiated returns.

1 Source: Bloomberg, as of 31 December 2018.

SHARE VIA EMAIL SHARE VIA EMAIL

Jeff Shen
Co-CIO, Systematic Active Equity (SAE) & Co-fund manager of the BGF China A-Share Opportunities Fund

MKTGQR0719E-879821-2/3