Why Alternative Data Is the Latest Power Tool on the Investor’s Belt

By October 16, 2019 October 18th, 2019 General
Why Alternative Data Is the Latest Power Tool on the Investor’s Belt

It might ring strange invoking alternative data in 2019, after terms like “alternative facts” have entered the vernacular. Thankfully, alternative data is not half as nebulous as that other alternative term, even though it may seem that way sometimes.

Alternative data is nothing new in the world of finance. Analysts and industry watchers have always relied on non-financial inputs that have an impact on financial developments. 

The weather, spending habits, fashion trends, popular hangouts, social unrest: Any one and all of those datasets can affect economic activity and gives analysts context on top of traditional financial information, like a company’s earnings or market data.

As independent analyst Campbell Gunn puts it in a recent Smartkarma Original Insight: “The ancient Greeks knew that the climate influenced the economy. In 1748 in Spirit of the Laws, Montesquieu stated that excess heat made men slothful and dispirited, which in turn would limit agricultural output and economic growth.”

Read Campbell Gunn’s full Original Insight: Alternative Data & Japan’s Personal Care Companies – An Evolving Weapon For Active Managers?

What’s changed since Montesquieu put quill to paper is the nature of data itself. Data these days is coming through a multitude of sources and covering a myriad of use cases.

From satellites churning out geolocation data to our smartphones producing detailed reports of our app usage, and from point-of-sale systems and credit/debit card transactions to social and consumer sentiment, data is as abundant as it is complex.

According to AlternativeData.org, total Buy-side spend on alternative datasets and infrastructure is expected to top US$1.7 billion in 2020, up from US$232 million in 2016. As different types of data become more easily available to more people, this trend can only keep climbing.

The Personal Care Touch

While alternative data is clearly interesting from a research and academic point of view, how can it benefit active investors?

That very question drove a set of Smartkarma Original Insights, a subset of research where Smartkarma engages Insight Providers for bespoke reports on specific topics, markets, or sectors. 

The Insight Providers, including Gunn and LightStream Research’s Mio Kato and Oshadhi Kumarasiri, combined a number of sources and analysis methodologies to tackle Japan’s personal care sector. Companies they looked at include Shiseido, Fancl, and Kose.

In particular, LightStream used point-of-sale (POS) data to complement company disclosures. POS data, writes Kato, has a much higher frequency and gets a lot more detailed. This allows analysts to dive deeper, produce more accurate forecasts, and better track trends and potential surprises down the road.

Read Mio Kato’s full Original Insight: Alternative Data – An Evolving Weapon for Active Managers (Fancl and Kao)

For example, Kumarasiri looked at a variety of data sources on Shiseido, Japan’s second-largest personal care company. According to his analysis, cosmetics sales in Japanese department stores have increased at a CAGR of around 9 percent from 2012 to 2017, which sounds like good news for companies like Shiseido. 

But using POS data, LightStream found that, while a lot of this growth is thanks to increased tourist spend, domestic spend on such products is declining in Japan, potentially because of trends like an ageing population and the shrinking of younger demographics – traditionally the target segment for such products. 

“As such, we believe domestic cosmetic consumption has matured, and all the companies are finding it difficult to grow their sales to Japanese customers outside of the high prestige segment, which is becoming increasingly competitive,” writes Kumarasiri.

Using the same data source, Kumarasiri and Kato can project how different segments will perform in the near future. “Nothing in this world is certain; things change every second. And the same theory applies to our investment thesis,” writes Kumarasiri. “POS analysis helps us identify… trends early and help investors to respond before the actual financial results are out.”

Read Oshadhi Kumarasiri’s full Original Insight: Alternative Data – An Evolving Weapon for Active Managers (Shiseido, Kose, Pola Orbis)

Consumer Sentiment Shaping Markets

Kumarasiri similarly used POS data to get a sense of how Japan’s beer industry is doing. He chose a good time too, right in the middle of the Rugby World Cup 2019 happening in the country. Kumarasiri expected a bump in beer sales during the major sports event, and he wasn’t wrong. 

Sales started picking up almost two weeks before the tournament started – average daily beer sales through drug stores grew 6 percent YoY, he writes. That growth sped up once the first games got going, growing 21 percent between 20 and 28 September. 

Kumarasiri notes this is a boon for an industry on the decline. Japan’s beer market experienced a significant slowdown after the government introduced amendments to alcohol taxes, leading to steep price increases and precipitous drops in consumption, according to a report on Research and Markets. Another such amendment is expected to further impact retail sales and total volume of beer until at least next year, the report notes.

At least the World Cup seems to have saved 2019. “We believe the overall Japanese beer market would grow 3 percent in 2019 solely through the contribution from the [tournament],” Kumarasiri writes.

Read Oshadhi Kumarasiri’s full Insight: TrueData POS: Japan’s Beer Market Trends During Early Days of the 2019 Rugby World Cup

Another example came earlier this year on Smartkarma. Devi Subhakesan and Rohinee Sharma of Investory conducted a deep-dive analysis of the fast fashion sector and its implications for ESG-minded investors – one of the first Smartkarma Originals.

For their research, Investory included consumer sentiment they sourced through their own survey in Shanghai and Mumbai. “Asia’s growing middle income group seems to be following in the footsteps of their Western counterparts with regard to their shopping attitudes,” Subhakesan wrote. The segment generally prefers the frequent buying and discarding of casual clothes, with emotional and social influences driving their purchases, the survey revealed.

Read Investory’s full Original Insight: Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

But they didn’t seem to be as aware of the environmental and sustainability implications of fast fashion, the survey found. “Improved awareness about the scale and seriousness of the environmental damage caused by the fashion industry in Asia can likely change how consumers prioritise their brand choices,” Subhakesan added. 

This is the kind of information that will generally not show up in a company’s financial disclosures, and yet can be material to a prospective investor.

Lead image by Kevin Ku, Pexels

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