InvestInU's Three Things, April 2020 edition
Apr 06, 2020
Practical insights to help you break into and thrive in the investment industry
In this edition
- Big Picture: Bazooka mode: ON
- Let's Discuss: Has the time for alternative data finally come?
- Career Advice: The do's and don'ts when cold-messaging professionals
1. Big picture: Bazooka mode: ON
- The impact of the coronavirus has started to show in economic numbers, with PMIs reaching new lows, unemployment claims reaching new highs and other indicators already showing the virus will have a record impact on the global economy.
- Q1 GDP estimates range from -4% to -10% (quarter-on-quarter). Economists do not expect a V-shaped recovery anymore and Q2 GDP numbers might not show much improvement – pushing the recovery into much later in the year than originally anticipated.
- IMF forecasts a recession worse than the one suffered during the 2008 Global Financial Crisis.
- The Fed had its “whatever it takes” moment and massively intervened in order to support the U.S. economy (by cutting rates to zero and promising to support lending to small businesses) and alleviate the stress being seen in money markets (by improving liquidity in credit markets and the terms on swap lines with other central banks).
- Governments are ramping up their plans for massive fiscal stimulus packages. The U.S. approved a package worth more than $2tn, including “helicopter money” through direct payments worth up to $1,200 per adult earning less than $75,000 a year. Many other countries have also promised significant income and welfare support.
Economic update – Key takeaways
- In this low-interest rate environment, central banks are forced to use increasingly more creative tools to support their economies. From yield curve control to direct intervention in credit markets, their roles are evolving into lenders of last resort to the overall economy.
- Governments have also entered a new era, with “helicopter money” drops now a reality. Their willingness and ability to implement massive stimulus might be a game-changer with significant long-term consequences such as having more countries embracing “big governments”.
- Overall, we’ve never seen such a coordinated effort in both fiscal and monetary policies.
- Markets are extremely volatile, with not only equity volatility (VIX Index) but also bond volatility (MOVE index) and FX volatility (JPM FX Volatility Index) reaching new highs.
- Many equity markets hit circuit breakers on both the upside and the downside (they temporarily stop trading when daily returns hit predefined levels).
- Several countries introduced short-selling bans (France, Belgium, Italy and Spain for example).
- Traditional diversifiers such as bonds and gold failed to perform as expected, most likely due to 1) investors rushing for cash and selling their most liquid assets to meet margin calls; and 2) systematic investors de-leveraging their portfolios (they generally target a specific level of volatility and hence need to reduce their exposure when volatility spikes).
- Signs of stress in funding markets are reminiscent of 2008, with spiking repo rates indicating de-leveraging of investors and a rush for cash, and cross-currency basis swaps indicating a global dollar shortage. This led the Fed to specifically target money and credit markets in their latest actions.
Market update – Key takeaways
- Markets are forward-looking and are already pricing in a recession. More likely than not, they will start rebounding before virus / economic news turns more positive, making it very difficult to time the bottom.
- It’s difficult to find hedges that work in this environment traditional correlations have broken down and markets are driven by a non-traditional factor (COVID-19).
- Forced selling and investors rushing for cash is leading to indiscriminate selling, which could in turn lead to significant opportunities for stock-pickers and relative value traders.
2. Let's discuss: Has the time for alternative data finally come?
What’s all the fuss with alternative data?
- The impact from the coronavirus has little historical precedents, making it difficult to forecast how the virus will evolve and what the ultimate impact on the economy will be.
- Relying on historical data or relying on published economic numbers (which have a substantial lag) doesn’t help in this environment.
- Alternative data could potentially add significant value as they are more flexible, more comprehensive, tend to have less of a lag (many are even real-time), and are available at different frequencies.
What are alternative data?
- The simplest definition: data that draws from non-traditional data sources.
- Examples include data obtained from satellite images, sensors, social media posts or financial transactions.
- They are often characterized along six dimensions: reliability, granularity, freshness, comprehensiveness, actionability, and scarcity.
- They are often large and complex, and require infrastructure and skills to properly handle and analyze them.
Who is using alternative data?
- Hedge funds and tech companies have been early adopters.
- Today, alternative data are becoming more mainstream with many asset managers and banks already expanding their capabilities in the area.
- The current crisis has shown that even central banks and governments have a really strong interest in using alternative data.
How can alternative data be used in this environment?
- Forecasting – for example: assessing when supply chains are coming back online (looking at air quality, electricity consumption, etc)
- Identifying alpha opportunities – for example: identifying companies that are benefiting from the lockdown by looking at consumer purchasing trends (are people buying more on Amazon? Taking up more Netflix subscriptions? Etc)
What does it mean for you and your job search?
- For you, it means trying to be ahead of the curve and thinking about what alternative data you’d use in this environment and what you would do with them. It also means you should start doing some more in-depth research into how alternative data are used and how you could apply them in your own investment process.
- For example: Can you use Google Trends to help forecast jobless numbers? How about trying keywords such as “unemployment insurance” and see how this can potentially forecast US jobless claims (a weekly market-moving indicator).
3. Career advice: The do's and don'ts when cold-messaging professionals
Whether it’s to prepare for an interview or simply to learn more about different roles or asset classes, a good idea is to reach out to industry professionals and ask them some of your questions. Many students are reaching out to us on a weekly basis and we often find that their approach is a bit clumsy and sometimes lacks common sense. We’ll show below what you should do and what you should avoid when reaching out to professionals via LinkedIn, email or even cold calling.
- Keep it short and to the point
- Be polite and respectful
- Try to find common ground
- Try to build a personal connection (don’t write like a robot or be overly formal)
- Have a clear structure and a clear message
- Have a personal intro
- Give some background
- Ask what you want in clear terms
- Thank them
What NOT to do
- Send it at the wrong time (i.e. don’t ask to meet a trader on a day the S&P 500 is down -10%, don’t send it on a Friday evening. You get the picture!)
- Ask them straight away when they are free for coffee
- Not giving any background
- Not thanking them for their time (especially if they do agree to help you)
Hi [Name], nice to “e-meet” you.
I am a student at Imperial College and I came across your profile [after seeing your post on.. / after searching for Imperial alumni / while searching for more information about..]
I am trying to learn more about the industry and I have a few questions about your role in particular. Would you have a few minutes to chat over the phone? I understand that you must be extremely busy and I’ll make sure to keep the call to a maximum of 15 minutes.
Looking forward to hearing from you.
We wish you all a nice week and stay safe!
Reda & Stephane