Dear Friends and Colleagues
Markets are non-linear. We have seen dramatic examples of this in Q2: the turn in China sentiment and the AI-driven boost to tech sentiment being just two examples. Linear thinking is a death-wish in markets. Hence, we need alternative data to capture turning points early, and independent conceptual thinking to fight ‘lazy narratives’ based on linear extrapolation.
A few examples below…
China: Re-opening hope shifts to structural concern
Over the last six months, we have worked aggressively to extract value from a broad suite of alternative data. Our real-time China activity indicator captured the changing momentum in the Chinese economy. This was certainly the case during Q2, when optimism about re-opening proved short-lived, allowing us to get ahead of asset moves in CNH and commodities–and even broader USD dynamics.
But data can only take us so far. Beyond tracking data, we are applying human judgement around the prospect of further stimulus. And we think markets remain overly hopeful that tactical stimulus in coming months can make a real difference relative to China’s growing structural challenges (overbuilding, demographics, global tensions).
US rates: The elusive terminal rate…
We have been of the view for some time that global rate trends, and US rates in particular, will continue to surprise to the upside. Specifically, we have been skeptical of ‘terminal rate’ analysis which tend to be ‘too precise’ and anchored in rather artificial nominal concepts.
This cycle is unlike any we have seen before. An open mind has been crucial when making investment decisions linked to the path of rates.
Our tracking of ‘banking trends’ during the quarter continued to show the absence of a smoking gun around a sudden stop in bank credit following the Silicon Valley Bank (SVB) and regional bank flare-up.
Moreover, the US economy is not levered like it was in 2008. This can be seen in the persistent resilience in the US housing market helping keep the Fed on a hawkish path.
Certain indicators have shown early signs of cracks in the US labor market, via initial claims (our alternative data have flagged these well). But our overall matrix of alternative labor indicators (designed to avoid over-focus on individual releases and towards a holistic approach) still show a remarkable degree of stability, suggesting that those saying that the terminal rate has been reached will again be humbled.
UK: Flexibility when facts change
All investors make mistakes; but it is crucial to respond quickly to new information to update any investment thesis accordingly.
We found ourselves confronting a changing investment narrative in early April when UK data failed to track the disinflation path we (and the BoE) had previously expected. We interrogated the data early, and studied signals from policymakers about the Bank of England’s reaction function, to conclude that rate hikes would continue throughout the summer–while the balance of risks suggested hikes could continue into Q4.
Once again, data tracking and human judgment combine to deliver deeper insights.
Tech: The beginning of the AI era
But the quarter may be remembered mostly for bringing artificial intelligence (AI) into the mainstream of investor thinking for the first time. US equity markets have surprised many this year, and AI optimism has been a key driver. The Nasdaq is up 32% ytd for one of its strongest H1 performances ever.
Semi-conductors (driven by a >60% gain in NVIDIA) have added $333bn to NASDAQ’s market cap during Q2 alone, while beneficiaries of AI on the software side (including Microsoft, Amazon, Google and Meta) have added $899bn during Q2. Just fifteen major AI beneficiaries account for 75% of the increase in NASDAQ during Q2!
It has been fun to be part of the AI revolution, with our MarketReader technology opening up new possibilities for investment professionals (to register for our first live demonstration, sign up here).
Markets are non-linear. But in this we see opportunities.
We are proud to serve the world’s most sophisticated investors. And we will continue to push ahead with a combination of proprietary data and human conceptual thinking, which we believe is the superior formula for alpha generation and risk management.
Thanks for the continued support.
All the best,
Founder and CEO Exante Data Inc.
For more information about Exante Data content in the public domain
We spend most of my time communicating with professional investors. But occasionally the opportunity arises when communication with a wider audience becomes possible. And the drumbeat of negative stories about the dollar prompted me to reflect on the changing narratives surrounding the dollar over a two decade career in markets. Let’s just say, the death of the dollar represents a hardy perennial.
Our substack is a useful vehicle for such out-reach. New subscribers are welcome.
The most popular piece in Q2 was “A Brief History of Dollar Hatred”.