Alternative data signals in post-pandemic China

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.

Risk: Investments in China are subject to certain additional risks due to issues relating to liquidity and the repatriation of capital.

Obtaining reliable data in China is often seen as a challenge for investors. Official economic statistics are regarded with a level of scepticism, and there are also widespread concerns about corporate transparency. But official statistics are not the only way to look at a country’s economy and companies. In an information-rich age, investors can tap into many other sources of data to assess the prospects of a particular industry or business.

‘Alternative data’ includes information on credit-card transactions, website visits and geolocation. It also includes shipping trackers, social-media posts and online reviews, among many other types.

As China’s economy is heavily digitalised, alternative data is especially valuable in the Chinese context. Investors can obtain access to a wealth of live transactions - providing a massive amount of real-time data that is raw, real and entirely unfiltered. Indeed, BlackRock’s team believe that the alternative data available in China is as good as that which they can access in the US. And this Chinese data can be highly effective in guiding investment strategies.

Researching regulation

This year, increased regulation has been a major concern for investors in China. Alternative data enables investors to track the regulatory focus on each company and sector, and see whether that focus is increasing or decreasing. That can provide insights as to whether the worst has passed, allowing those who have done their research to buy into these companies while they are still out of favour.

Inflation is another area where alternative data can help. It’s relatively easy to look at the overall cost structures of companies and see where inflation could bite. But alternative data offers insights into brand strength, allowing investors to discern which companies should be better placed to pass costs on to their customers.

Retail, ratings and reviews

The unique composition of China’s investor base makes alternative data especially useful to equity investors. In many global markets, highly traded stocks are dominated by institutional investors. But in China, the majority of turnover is driven by retail investors1.

The prominence of retail investors in China is significant, because these investors like to use social media to discuss their ideas. Their postings provide a good reflection of what the wider investment community thinks about any given company. China also has a regulatory requirement that companies must answer investor questions through their websites. Those questions and answers are good sources of information – and they can expose anomalies and raise red flags.

The views of the public can be useful in other contexts too – most obviously, in the attitudes of consumers to the companies that cater for them. Restaurant chains are an obvious example. Important sources of data here are popular websites that host restaurant reviews. These give direct insights into consumer sentiment and behaviour.

In their reviews, customers submit their average spending per head. BlackRock’s team can collect this data daily, aggregate it and create metrics to summarise the business. They can see, for example, how many restaurants have opened, whether prices have gone up and what customer sentiment is like towards a particular branch or in a particular region.

When combined with other data sources, these review sites can help provide an even finer level of detail. By tracking tickets on a restaurant chain’s queuing app, BlackRock’s team can see how many tables each restaurant had turned over. When combined with information on party sizes and spending per head from review sites, this allows the team to build up a picture of the whole chain’s daily revenue – providing a real-time assessment of how the business is coping with current conditions and allowing investment decisions to be made well in advance of corporate results.

Travel and trade

One area of particular importance to most investors in China is travel. Domestic tourism is a significant part of the Chinese economy. Although Covid has largely been contained in China, there have been sporadic outbreaks, which will have affected people’s mobility. To monitor this, investors can use geolocation datasets from Chinese map vendors to track inflows and outflows at major cities.

Another current concern is the disruption to China’s supply chains. Here, tracking information on seaborne traffic and shipments can be used to monitor the knock-on effects of the pandemic, using data derived from the transceivers in vessels. This data reveals the location of each vessel, the weight of its cargo, its ports of origin and destination, and its departure and arrival dates.

Clearly, accumulating and sifting this data is beyond the reach of smaller investors. But for large, sophisticated institutional investors, the availability of such data is invaluable.

The focus in future

These are just some examples of the many ways in which alternative data can provide a precise picture of what’s happening ‘on the ground’ – reinforcing or challenging investors’ fundamental views.

A future area of focus will be matching the wealth of consumer data with a better grasp of business transactions. Some of China’s mushrooming data start-ups may be able to provide that information in future.

1Goldman Sachs, 2020