Coronavirus News Sentiment: How much is NOISE in the SIGNAL?
Over last few weeks, Corona Virus has led to a worldwide scare. As of now, the death toll in China has surpassed 700. According to the official data released early Friday by China, more than 70 new deaths and 3,100 new cases emerged in the previous 24 hours alone. What makes the matters worse is that the total number of confirmed cases has risen to more than 30,000 and the sceptics fear that this number is only a small percentage of actual infections.
As expected, this is affecting the global markets too. Though it is believed that there is a serious clampdown by Chinese authorities on the type of news flow leaving its borders, but with each piece of news (good or bad), the fortunes are fluctuating. For example, global markets heaved a sigh of relief when it was reported that Gilead Sciences has offered an experimental drug for Corona Virus treatments and testing and that the biotech firm has formalized an agreement with China to conduct clinical trial of Remdesivir, supposedly an effective drug against Corona Virus.
There are several important aspects in how markets have reacted to these developments. The first is that though this is a global health emergency and there is no proven cure yet in sight, the media coverage is still disproportionate considering the tangible impact estimated as of now. The virus attacks are very much like terrorist attacks, they generate more coverage than the events with similar or even higher impact. In the age of rapid information dissemination and huge role played by social media, this skew is even more prominent. Naturally, financial markets also react more to these events.
The second interesting aspect is that the maximum negative impact has been outside China. One of the worst affected countries from Corona Virus is Thailand. It is anyone’s guess how long it will take before infection rates stabilize, but it is quite possible that due to its size and diversification in economy, China will be less negatively impacted than some of the other smaller countries in its neighbourhood. More granularly, different markets and companies will react differently to these news developments. The same news can very well be negative for some industries (airlines and tourism) and good for others (some specialized pharma and biotech firms, manufacturers of masks, etc).
The third aspect is that there will always be some participants in global financial markets who will overreact and there will be others who will barely flinch. It is difficult to tell a-priori who is right and who is not, and only time will tell. Butthe point gets reiterated that the sentiment plays a much important role than tangible impact of material developments. Whether the impact of Corona Virus is NOISE or SIGNAL or a little bit of both, the reaction of financial markets proves the age-old dictum ‘News may be the same, but the impact could be vastly different because of the varied nature of Sentiment’. The tangible impact and news flow matter for the markets but the sentiment matters much more. And the analysis of sentiment helps one position better with respect to the market developments. In part 2 of this blog, we will look at how sentiment evolved over the last one month in some of the worst hit Asian markets
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EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.
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