It is fair to say that, so far, 2022 has again been an unusual year for financial markets. A constantly shifting perception of risk has placed pressure on investors to respond with great agility.
More recently, there has been a flight to safety as investors reduce their exposure to risky assets, thinking instead in terms of short and long-term implications of this very much risk-on shift.
At this juncture in time, it’s important to consider the main themes that have been driving volatility in markets and contributing to this largely risk-on environment.
The Russian problem
February was marked by the escalating tensions and then full-scale Russian invasion of Ukraine.
It is commonly acknowledged that Russia has never been a simple case for foreign investors, even when accessed indirectly through mutual funds, exchange-traded funds (ETFs), and American depository receipts (ADRs).
Its dependence on oil further leaves it vulnerable to commodity price swings. Indeed, the price of crude oil rose to levels not seen since 2014, due to heightened concerns over disruptions to global energy supplies.
Within this high-risk geopolitical context, investors have benefitted from the insights alternative data sets provide.
Following the invasion of Ukraine, Sentifi’s sentiment score signaled a strong and positive sentiment shift for oil and gas drilling (488% increase), oil refining (82.50% increase) and oil equipment and services industries (71.54% increase).
This momentum was not reflected for oil and gas integrated, mid-stream or energy production industries which experienced sentiment deterioration over that same time period. This sentiment movement directly correlated with the broad market outlook for the global energy sector.
Supply chain matters
Supply chain issues continue to make headlines, particularly as consumers are now seeing prices rise and delivery times lengthen amid product and component shortages.
Of course, this has a significant impact on value chains and investors need to choose those companies best positioned to navigate supply chain stresses.
This involves careful due diligence of product diversity and complexity, company management as well as sources of supply.
Again, alternative data can help investors as they perform their due diligence. For those investing in logistic and freight stocks, the company data below would have been helpful, showing as it does stocks that outperformed peers from a sentiment perspective following the Ukraine crisis.
The shift in sentiment signaled a price movement, which informed investment decisions.
| Logistics and Freight Stocks | Sentiment Score Change |
| Far-Eastern Shipping Co PLC | +47 pts |
| Royal Mail PLC | +39 pts |
| Nippon Express Holdings Inc | +25 pts |
| Grindrod Ltd | +25 pts |
| Delhivery Ltd | +21 pts |
Inflationary concerns weigh on investors
Inflation has been another characterizing aspect of 2022 so far, with the Ukraine war only inflaming the commodity complex and jolting already-high rates.
A prolonged conflict in Ukraine would keep upward pressure on energy prices, and in turn contribute to upward pressure on inflation.
Europe’s reliance on imports of Russian gas makes them more vulnerable to inflation than their US counterparts.
Indeed, the UK recently raised tax rates and there is currently significant buzz around the cost-of-living squeeze in Europe. In the States, there is increased evidence of US Fed hawkishness and deteriorating investor sentiment as inflation becomes more embedded.
Sentifi’s inflation sentiment for India, China, Japan, US, UK, Canada and France deteriorated strongly over the past 12 months, indicating that the current macro-geopolitical landscape has caused investors to expect volatility to persist in the short-term.
Keeping up with ESG
ESG is becoming more and more of a focus as climate disclosures become a more critical priority and obligation for companies all over the world.
In March 2022, the ISSB launched a proposal to create a comprehensive global baseline of sustainability disclosures.
In the US, the SEC also recently published a proposal requiring companies to disclose emissions data that is verified by third parties. The fact is, within today’s volatile, the ESG qualities of a business are not static and can change within an instant.
As outlined below, in the past week alone, governance performance measured by Sentifi’s G scores has deteriorated for several sectors (real estate, basic materials and financial services).
Societal performance measured by Sentifi’s S scores has also deteriorated for the industrials, consumer cyclical and communication services sectors.
This information, so valuable to investors, would not have been captured in the company’s annual ESG disclosure.
Companies need to be reporting and held accountable on an ongoing basis. This is where alternative financial data sources can help.
Sentifi’s real-time ESG performance data, sourced and assessed by machine learning technologies, is already being used by ESG investors to better understand the real-time underlying price signals and sentiment in stocks, commodities, currencies, and cryptocurrencies and therefore, to construct portfolios with strong positive momentum around ESG performance.
Where (and how) to look?
These rapid changes to risk profiles for assets, and therefore returns, have made investors re-evaluate how they assess whether a fund is deemed ‘safe.’
Traditional data alone cannot provide the necessary 360-degree view of the markets that is necessary to monitor and manage risk.
In order to accurately evaluate the risk profile of a sector, fund, asset class or company, investors need to supplement their analysis and due diligence with alternative data sets that monitor investment signals as they emerge in digital channels.
Without these insights from digital channels, investors could open themselves to blind spots that degrade portfolio value in unexpected ways.
In such a volatile and ever-changing investment landscape, momentum changes in social media, news, forums and blogs can provide valuable indicators of likely direction of price movements.
Marina Goche is CEO of alternative data provider, Sentifi.