As the Coronavirus disease spreads across the world, investors are increasingly attempting to quantify the global impact of the health pandemic. Bridgewater estimates a staggering $4 trillion decline in US corporate revenue, which without significant intervention will cause over a 6% decline in GDP this year.
The key questions that the finance world are asking are just how deep this will depress our economy, and when will we bounce back? This applies at both the micro- and macro-economic levels - starting from Starbucks share price for example, all the way to the economy as a whole. While quarantines have ground the economies of many nations to a halt, we have still to see the prolonged long-term effect of these structural changes beyond simply lifting those quarantines.
Alternative data can help paint a picture of the true extent of this pandemic, and one analysis quoted by the Financial Times in "Investors hunt for alternative data to track coronavirus shock" looks at statistics for restaurant openings in the Chinese market:
"In early February, for example, 83 per cent of about 1m restaurants tracked on Meituan-Dianping, China’s biggest delivery platform, remained closed. As of February 14, services were still suspended at 87 per cent of roughly 5,500 outlets operated by Luckin Coffee, China’s rival to Starbucks."
Going one step further, one global hedge fund which we'll refer to as the Seeking Alpha fund (for privacy reasons) has turned to online reviews to gain an edge. While we cannot disclose the name of the fund, they have given us explicit permission to discuss their broad use of review data in their operations - though the examples outlined below are purely hypothetical.
Much like social media streams, reviews offer an unadulterated view into the mind of the consumer through an endless stream of user generated content that has been available for over a decade. Research shows a correlation between the stock price of a company and their reviews, and this is increasingly being applied in search of alpha.
The Seeking Alpha fund uses online reviews to influence their trading strategy in both micro- and macro-economic terms.
Tracking reviews provides indicators such as review volume (how many reviews is that company receiving over time), review averages (the star ratings of those reviews) as well as aspect-based sentiment (breaking down each review by classifying for sentiment around pricing, service and more).
1. Tracking reviews for specific companies
Taking the InterContinental Hotels Group plc (LON: IHG) as an example, the Seeking Alpha fund is able to track reviews across different platforms such as Google, Tripadvisor, Booking and countless other review platforms across locations in the IHG portfolio.
Similarly the Seeking Alpha fund tracks Zynga Inc. (NASDAQ: ZNGA) reviews across both Apple Appstore and the Google Playstore for their portfolio of apps.
In both these cases, review volume, review averages and the more in-depth aspect-based sentiment can provide a window into the future performance of those companies.
2. Representative basket of companies
Much like inflation is calculated based on a basket of goods, the Seeking Alpha fund has compiled a basket of companies that they feel representative of the economy. Tracking reviews for those companies provides a view into the macro-economic environment of the economy.
This basket could be comprised of a group of small and medium-sized businesses, which according to the World Trade Organization, represent over 90 per cent of the business population, 60-70% of employment and 55% of GDP in developed economies. Similarly, this basket could also be comprised of S&P 500 companies, which when aggregated can provide a powerful indicator for where this index is heading.
As numbers come in from a plethora of sources, investors like the Seeking Alpha fund are supplementing official data with alternative data sets like online reviews. Ultimately, this helps paint a picture of where specific companies and the economy as a whole is heading, to avoid "flying in the dark".
Reach out to Reviewshake to inquire about how our data services can help inform your trading decisions today.