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Investing in an age of ‘infobesity’ – separating sentiment from market noise

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Jay Mawji

Even in the pre-digital age, financial news travelled fast. Humans’ hard-wired love of both gossip and profit have long combined to make stock tips, trading floor rumours and market hunches a potent force.

Potent not just because of the speed at which they travel, but because of their ability to not just reflect the market, but shape it too. In fact, to the intelligent investor, knowing what is being said about the market is as important as what the market is actually doing.

Sentiment, signals and shoeshine boys

One of the best examples of someone identifying and acting on the clues provided by such market sentiment is that of JFK’s father Joseph Kennedy Sr.

The roaring bull market of the 1920s was good to the founding father of the Kennedy dynasty, and like many he made a stack of money in the seemingly endlessly rising market.

In 1929, as the market reached its frothy peak, Joe had an epiphany as he sat down to have his shoes polished. While applying polish to the Kennedy shoes, the shoeshine boy talked excitedly about the stock market and his preferred stock tips.

This unsolicited advice proved life-changing for the market titan; he promptly went back to his office and began unloading his stock portfolio.

In fact, he didn’t just get out of the market, he aggressively shorted it – and then made a fortune in the crash that followed.

Of course such signals seem obvious with the benefit of hindsight. In reality no-one rings a bell when markets reach their peak. Investors can only base their decisions on the information available to them at the time.

The shoeshine boy’s comments were not recorded for posterity, and while he may have lacked the Harvard degree, wealth and influence of Kennedy Sr, he was nevertheless a representative of that powerful but slippery concept – market sentiment.

Infobesity

Nine decades on, sentiment remains a powerful directional signal for investors to follow and act upon.

The most conventional way sentiment has been applied to trading is to long stocks when positive comments are being made about a company, and to short stocks when negative comments are being made.

Clearly that principle has evolved into a fine art, and today’s fund managers typically use multi-layered data strategies in which fundamental market data is overlaid with comprehensive sentiment capture and analysis.

The one snag is that the digital revolution has turbocharged both the volume of sentiment information available, and the speed at which it travels.

Investors are confronted with an ocean of information every day. While much of it is publicly available, no single individual could ever hope to see – let alone understand – more than a tiny fraction of it.

To give an idea of the scale we’re talking about, let’s assume an investor holds 10 high profile, publicly-traded stocks, each of which is mentioned frequently by news or social media.

Within just a couple of minutes, it’s not unreasonable to assume that the stocks in such a portfolio might be mentioned in 100 news media stories around the world – or 10,000 times on social media sites.

With the average person able to read just one 600-word news article in those two minutes, you can see how the almost exponential rate at which information is being published means keeping up with everything that’s being said is impossible.

In the face of such overwhelming quantities of data and intelligence – or ‘infobesity’as it’s increasingly being referred to in the market – it’s tempting to dismiss such constant chatter as mere noise.

Symphony of noise

 But while some, or even much, of this information may be a distraction, together it is far from irrelevant. Together this symphony of noise is what best reflects – and shapes – the market.

Most intriguing of all, we’re now arguably at a point where it does so more than the underlying macroeconomic reality.

Until recently central bankers revelled in their ability to make the financial weather. Yet for the first four months of 2018, Mario Draghi tried and failed to talk down the Euro. Instead the single currency rose steadily, hurting Eurozone exporters and throwing a spanner in the bloc’s long-hoped for recovery.

Meanwhile Bank of England Governor Mark Carney’s efforts to shepherd UK market expectations by issuing ‘forward guidance’ on the Bank’s intended monetary policy have failed to deliver the orderly calm he sought.

Dubbed the “unreliable boyfriend” by City wags after failing to stick to his much-trailed guidance, Mr Carney’s pronouncements – initially pored over and treated with reverence– are now greeted with cynicism and even indifference.

The reason is that in the current environment of political uncertainty and infobesity, there is no single, clear reference point for the markets to follow. Markets are instead led by the hunches, emotions and actions of thousands, if not millions, of individuals.

In the age of Trump and Brexit, black swan events can come from anywhere; be they a rogue tweet from the President or an unexpected result in an era-defining referendum.

Fundamentals – such as central bank policy, macroeconomic data or shareholder reports – provide only part of the picture.

By contrast it’s the huge, amorphous mass of sentiment data which gives the best clues as the market’s likely next move.

While the big trading houses bristle with teams of highly-paid analysts who together absorb and study terabytes of sentiment data, AI is now putting such power into the hands of smaller scale investors.

Investment platforms like Infinox now offer sophisticated private investors access to tools which use AI to ingest and analyse millions of sentiment data points, and turn it into clear, understandable and actionable market intelligence.

While infobesity means the signs are harder to spot amid all the background noise, paradoxically it also makes them more powerful – as a sustained sentiment trend has the ability to move markets in a way few other things can.

That’s why effective sentiment analysis, especially when used in conjunction with traditional quantitative data, empowers investors to build highly sophisticated and responsive investment strategies.

As the AI revolution picks up speed, that power – previously the exclusive preserve of deep-pocketed investment houses – is being put within reach of all investors.

Where Kennedy Sr led, we can now all follow.

Jay Mawji is managing director of the global trading platform Infinox

Investing

COVID-19 and PCL property – a market on the rise?

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COVID-19 and PCL property – a market on the rise? 1

By Alpa Bhakta, CEO of Butterfield Mortgages Limited

Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.

Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.

Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.

However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.

Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.

However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.

Investors are flocking to PCL opportunities

The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.

Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.

Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.

So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.

Remote working and PCL

On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.

While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.

Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.

A busy few months

Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.

In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.

Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.

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Investing

An outlook on equities and bonds

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An outlook on equities and bonds 2

By Rupert Thompson, Chief Investment Officer at Kingswood

The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.

The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.

Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.

Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.

Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.

Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.

Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.

We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.

We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.

We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.

On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.

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Optimising tax reclaim through tech: What wealth managers need to know in trying times

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Optimising tax reclaim through tech: What wealth managers need to know in trying times 3

By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange

This has been a year of trials: first, a global pandemic and, now, many countries facing the very real possibility of a recession. For investors, private banks, and wealth managers, these tumultuous times have manifested largely in asset price volatility, ultra-low interest rates and uncertainty about when things may level out, as well as questions about what can be done to safeguard portfolio performance.

The answer here lies within identifying and creating efficiencies to maximise performance and minimise cost, and while there is a slew of options as to how to do this, they are often siloed or have a single USP. Tax optimisation, on the other hand, provides benefits to all, not just in increasing returns for investors, but also in creating economies of scale across stakeholders, creating millions – if not billions – in savings for banks.

Evolving tax reclaim

The tax reclaim process used to be a tedious one banks had to manage themselves, and required detailed, industry and country-specific knowledge to stay on top of constantly shifting requirements and regulations. And when we consider that many countries – such as the UK – allow for capital gains exemptions, tax optimisation may not seem like an integral part of the process. However, this isn’t the case for all countries, and can lead to severe after-tax implications on global portfolios.

Furthermore, even if you’re able to avoid double taxation, getting the money back is not always as simple as it sounds. This, combined with the fact that countries often have contradictory taxation rules or requirements, makes navigating the tax reclaim space a challenge even for those with the right expertise and experience.

Ultimately, providing tax optimisation to investors ends up being a heavy lift for private banks and wealth managers, who often don’t have the right solutions, are relying on outdated technology and manual processes. While this is generally fine for business, it is no longer fit for the purpose when it comes to tax optimisation. To date, knowledge and expertise have been the key to protecting and maintaining profitable investments and avoiding tax leakage. However, through tax optimisation services starting to emerge, portfolio managers can now manage and reinvest easily.

Today, technology has evolved the process so that banks are able to access and submit tax reclaim – and the relevant documentation – online, leaving the tech provider to coordinate next steps with custodians and tax authorities behind the scenes. In essence, taking the legwork out of the process while assuring consistency and completeness in execution.

Simplifying tax through tech

While tax optimisation may seem like an easy choice in theory, it is not always the go-to for every private bank or wealth manager. Without the right supports and setup, including innovative technologies and automation, tax reporting must be done manually, leading to labour intensive processes and huge time wastage. Changing these processes can be overwhelming for those used to a certain way of operating.

By making tax reclaim digital, banks will be more able to optimise returns and gain efficiencies while reducing redundancies and unnecessary complexities. Cloud based solutions or platforms can offer a safe and secure solution for banks, wealth managers, and investors to access and submit any information required, processing the data automatically for conformity and completeness.

It is critical that providers who intend to offer tax services are able to do so efficiently with the right software and data processing capabilities. Not only does this drive continuity in service and efficiencies in process, but it is the only sustainable way to handle such a complex landscape sustainably without wasting time or money.

End-to-end, technologically driven tax services offer a huge number of advantages to private banks and wealth managers, the most important of which is the ability to provide continuity through tumultuous times. As we move through the end of 2020 into 2021 this will only be increasingly important as banks, managers and investors look to provide new services to clients and strengthen existing relationships in a difficult market.

As investors seek to find returns amid the global economic downturn, the demand for innovative solutions will only increase. Technology like cloud-based software, AI, and data optimisation can all serve to improve not just the tax reclaim processes, but the overall client experience within capital markets.  Private banks and wealth managers are suitably equipped to provide these innovative solutions, but those who do not prepare themselves effectively and keep ahead of trends will run the risk of losing current and new clients to someone who can offer more for less.

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