How big data informs our investment decisions in China

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

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors 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 foot traffic help build a view on publicly-traded stocks. This approach can be especially helpful in China where investors have historically been fearful of inaccurate economic data.

We then rank stocks using models and analytics including artificial intelligence, and machine learning.

There is no guarantee that a positive investment outcome will be achieved. Deep analysis of big data together with a quant-based approach can offer investors the potential for differentiated returns.

Capturing retail sentiment

China is the second largest equity market and the second largest bond market in the world,1 with retail investors making up more than 80% of total trading volumes for equities.2

Before the days of social media, blogs and online bulletin boards, it was difficult to determine what was driving the mood among retail investors. Unlike the common perception, these play host to vibrant an open discussions about investing and the participants are drawn from all parts of Chinese society.

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.

“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 digitalization do not replace old methods, but rather add to the offering, providing clients more tools to help 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” which indicates the presence of metal and the movement of trucks to and from industrial sites can be analyzed 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 stocks can be evaluated daily, providing an investment framework to help inform active investment decisions.

Innovative technology guided by human insight

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

We believe 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 1970s.3 Instead – the automation and digitization 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 to maximize their investment in China.

1Source: Bloomberg, March 2020
2Source: Goldman Sachs Investment Research, September 2019
3Source: Bureau of Labour statistics, June 2020