investment insights

    Tracking the Recovery with Big Data

    Tracking the Recovery with Big Data
    Stéphane Monier - Chief Investment Officer<br/> Lombard Odier Private Bank

    Stéphane Monier

    Chief Investment Officer
    Lombard Odier Private Bank

    Key takeaways

    • Investors and markets are focused on the emerging economic recovery
    • Big data, combined with analytics, is proving a valuable tool to inform investment processes
    • Economies are recovering in two phases, with Asia in the lead, followed by the main European countries. Laggards include the US and the UK.
    • A ‘V-shaped’ recovery is priced into equities with little potential upside; our data will monitor this evolving trend.

    After six weeks at sea, the bulk carrier “Anetos” docked at the port of Xiamen, China on 11 June a little before 10 p.m. local time. The Marshall Islands-registered vessel carried a cargo of copper concentrate from Chile. On its own, this snapshot of international trade does not tell us much about the world economy. Aggregated with thousands of examples, and correlated with other indicators, it has the potential to reinforce, or challenge, investment convictions about global trade.

    Combined with the right analytical skills, big data is now opening new opportunities for investment insights. Tracking technologies, installed in devices from mobile phones to commercial shipping, have made data both highly granular and timely. Investors relying on traditional shipping data from the Chinese authorities, for example, will have to wait for at least a month to spot a trend in the country’s imports. At the time of going to print, the latest available numbers date from April 2020. Yet commercial vessels carry an identification system tracking their positions every few minutes or even, when moving, every few seconds.

    Big data tools can show us cargoes moving through Chinese ports within 24-hours, and by comparing official sources with such aggregated ‘real time’ data, we see high correlations with official trade statistics. More importantly, this gives us a timely understanding of the health of key parts of the international economy.

    With the Covid-19 epidemic’s first wave now under control, we are looking to understand the re-emergence of economies around the world as markets reflect the view that the worst of the pandemic's impact is behind us.

    The pandemic is bringing these statistical advances to life

    The challenge for investors is to gauge progress toward ‘normalisation’ (see chart 1), in comparison with historic levels of supply and demand. As a result, this pandemic is turning into the most powerful test yet for the value of data science.

    The right data sets can help us to improve our real-time diagnosis of the recovery and market trends. That means that it can also help us as we make investment decisions and construct portfolios. We are working with data from all of the regions affecting our portfolios and choosing our sources carefully. Before we can include a data set in our investment analysis, we compare it with other indicators to ensure that their insights are adding value to our forecasts.

    We can then use this to fill the gap between official government numbers, which often reports statistics with a lag of a month or more. New data sources also let us capture measures, such as pollution and mobility, simply not available until now. The pandemic is bringing these statistical advances to life as we track the economic recovery and find new ways to understand economic developments ever closer to real time.

    Big data’s seven pillars of wisdom

    We watch seven high frequency signals: imports and exports, city congestion levels, mobility data, retail/grocery consumption, workplace presence and air pollution levels for production. Taken together, they can give us a picture of the state of an economy’s recovery when compared with a pre-crisis average of three years, or from 2019.

    Tracking levels of air quality can point to a pick-up in industrial activity, and we use indices that capture the numbers of people on business sites, cross-referenced with mobility data and city congestion indicators, against historic averages. These can tell us a great deal about the pace of economic activity.

    By the end of this year, we expect that most economies will to have returned to above 85% of their pre-pandemic activity levels

    Economic data broadly, and big data specifically, shows that the recovery is happening in two phases. National differences (see chart 2) show that in the immediate aftermath of the lifting of lockdowns, there is a phase of fast recovery. The second phase will be much longer, as certain sectors, such as travel and tourism remain depressed for longer. Unemployment rates, at record levels in many economies, should slowly fall over the next two or three quarters to levels close to their pre-pandemic levels.

    By the end of this year, we expect that most economies will to have returned to above 85% of their pre-pandemic activity levels. South Korea, Japan and China have already crossed that threshold.

    The chart also applies coloured arrows to show the direction of an economy’s momentum. This indicates that most economies in the Group of 20 nations have already bottomed-out and that there is a correlation between the speed of lockdowns, and recoveries. Most European Union countries, including Germany, France and Italy, along with Switzerland, are accelerating after lifting their lockdowns. The UK, which was slow to impose confinement, is lagging its continental neighbours.

    Clear that there is a correlation between the speed of lockdowns, and recoveries. So that north east Asia’s economies are leading the normalisation process, while in Europe, the UK lags the rest of continental Europe on a relative basis.

    Equity markets have started pricing-in a ‘V-shaped’ recovery, leaving little in the way of risk return available for stock market investors

    Risks and markets

    The main risk to economic recoveries is of course the possibility of a second wave of Covid-19 cases. In the US, new cases rose, including 25,000 recorded for 13 June, in part reflecting more testing. A surge of new infections in Beijing over the last four days, following a 55-day period with no domestic cases, has led to lockdowns. Still, it is worth remembering that the tools for managing a resurgence of infections are stronger, compared with three months ago.

    As the pandemic’s risks have subsided, especially in the US, European Union and emerging markets, equity markets have started pricing-in a ‘V-shaped’ recovery, leaving little in the way of risk return available for stock market investors. Earnings per share (EPS) expectations for this year have fallen in line with the wider economic slowdown, but since lockdowns have started to lift, they have begun to stabilise.

    The S&P500 now looks fairly priced. Assuming a rapid economic rebound, that leaves little upside for equity investors over the next 12 months. We continue to monitor our data signals to confirm that a V-shape recovery is indeed unfolding, along with second-quarter earnings and company guidance, and adjusting our clients’ portfolios to any potential downturns.

    Wichtige Hinweise.

    Die vorliegende Marketingmitteilung wurde von der Bank Lombard Odier & Co AG (nachstehend “Lombard Odier”) herausgegeben. Sie ist weder für die Abgabe, Veröffentlichung oder Verwendung in Rechtsordnungen bestimmt, in denen eine solche Abgabe, Veröffentlichung oder Verwendung rechtswidrig ist, noch richtet sie sich an Personen oder Rechtsstrukturen, an die eine entsprechende

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