Volatility and futures portfolio managers are not the only capital market professionals that seek the ability to look around the corner when it comes to public policy trends. Individuals rely on investment advisors to provide guidance regarding good investments typically with a longer time horizon for holding the assets and realizing alpha gains on those assets. PolicyScope data provides investment advisors with valuable trend projection tools that help them meet client needs for solid guidance based on data and facts.
A Challenging Time for Investment Management
Normally, most investment advisors can treat public policy risks as background noise. Their main priority is to deliver guidance that enables investors to remain on their preferred, separate, portfolio trajectory despite transitory shifts in public policy.
The main exceptions center on investment advisors focused on tax-optimization strategies and municipal bond market advisors, for whom public policy shifts are a core focus. We can discuss those special cases a different day.
Today's post focuses on investment advisors responsible for medium-term alpha generation strategies because they have an especially difficult job these days.
Treating public policy risks as background noise does NOT mean Investment advisors ignore public policy risks. Among other things, clients can be quick to raise questions in response to alarming headlines regarding the latest policy drama, dispute, or initiative.
Investment advisors traditionally rely on subject matter experts, sophisticated strategists, former government officials, and gurus to help them identify when a policy shift is strategically important (or not). The mechanism works well in normal times, because the velocity of change is indeed banded as policymakers tend to govern from the middle. These are not normal times.
With the vast majority of global GDP seeing major elections and experiencing major policy shifts, it is impossible to treat public policy risks as a random, exogenous variable.
The 2024 elections bring a new set of policymakers to the table. They will hit the ground running in January 2025 (actually, they are already in place in the UK and the EU). All will seek to make good on campaign promises as quickly as possible. Inevitable contradictory and conflicting choices will arise quickly across advanced economies across a broad range of issues that directly impact capital markets:
Renewable Energy
Carbon-based Energy
Energy Efficiency
Carbon Emissions Reduction
Cryptocurrency
Payments Policy
Green Subsidies
Fiscal Spending
Trade Policy
Supply Chain Management
Foreign Policy and a range of increasingly hot conflicts (Ukraine, Middle East)
These policies impact every company and every consumer (and every voter!). They will shift the direction of economic growth and create economic pressures that central banks must manage through their interest rate policies.
Additional policy risks will play out in the United States, compliments of a recent Supreme Court decision. Whoever loses the election will be able to challenge every current and past regulatory policy decision in the courts. So even when a regulator makes a decision, it may not be implemented.
The Bottom Line: today's political risks create tomorrow's policy volatility...which will play out across a time horizon that correlates roughly to the time horizon targeted by many investment advisors: 2-5 years.
Most investment advisors can rely on the scaffolding of experts to provide guidance, but they have a problem. Time delays.
It takes time to connect with the expert or read the latest analysis. Time is the most precious commodity in the capital markets. If an investment advisor takes too long in providing guidance to a client regarding the latest technical regulatory policy shift that made the news or the latest screaming headline, it results in suboptimal outcomes for the client. Investment decisions can be made with incomplete or incorrect information.
The velocity of change and the demand for solid investment advice will increase dramatically during 2025 as new governments start taking action.
Fortunately, advanced technology and a new kind of data can help investment advisors stay ahead of the curve and identify a trend as it begins to emerge.
Policy Trend Projection for Investment Advisors
Investment advisors do not need to become public policy experts in order to provide solid advice to their clients. Nor do they need to replace their existing trusted sources of analysis. Nor do they need to be quants that calculate every possible trend projection.
But they DO need the ability to check a few charts quickly to get a sense of direction and intensity in the public policy process. High level trend projection requires three components:
(i) a baseline value;
(ii) metrics to identify a departure from the baseline; and
(iii) metrics to identify direction of travel.
The challenge is that policy risks present first in verbal format, but capital markets measure risk quantitatively.
PolicyScope data and signals were designed from the beginning to bridge that gap in order to provide quantitative metrics that capital markets can use to detect, manage, and price risks.
Baseline Value -- Notional Volume Time Series Data: The patented PolicyScope process converts the words of public policy into daily multivariate notional volume data that illuminates trends, patterns, and rhythms in the public policy process. We measure the pulse of the public policy process daily and automatically.
Consider the time series above for the term "cryptocurrency" during 2019. The large sustained increased volume of activity for rhetoric (the blue line) measures the amount of news coverage during that period for crypto triggered by Facebook's Libra proposal. Actual policy activity (the green line) was low until autumn of that year. The news cycle and the policy cycle aligned as policymakers began to focus in earnest on extending the regulatory perimeter to cover crypto.
Anomaly Detection -- MACD Analysis: As noted in our post last week, calculating the moving average for any given time series provides perspective on whether -- or not -- the current day's activity is departing from the baseline. Displaying comparable calculated MACD values for tradeable instruments tells an investment advisor at a glance whether or not the current activity is consistent with longer term rhythmic patterns in public policy for any issue.
Quantitative Policyscope data also makes it possible to calculate and display the daily difference in policy activity (the Rate of change, or "Delta") to obtain a sense of aggregate daily volatility. We consider the Delta to be the pulse of public policy, delivered to your fingertips through our Tableau dashboard or Databricks datafeed.
Trend Projection -- The Momentum Index: Direction of travel matters. At BCMstrategy, Inc. we also measure POSTURE from official sector language in order to determine whether the policy activity in question moves the ball forward, stays neutral, or throws up roadblocks.
We will provide a separate blogpost on the difference between sentiment and posture. The main point for today is that multiplying action levels by posture for any given day provides an immediate, objective metric on whether policy is advancing even amid great volatility, as noted in the Momentum Index chart above for the policy vertical "electric vehicles" during 2Q2023.
Our Tableau dashboard currently configures all the screens together in one dashboard for maximum operational efficiency and cognitive insight formation:
Real World Use Cases -- Investment Advisors
Investment advisors can use PolicyScope data to deliver immediate informational advantages to their clients as well as achieve considerable operational efficiencies during their daily workflows.
Assume a day when headlines are full of news regarding a new policy shift in one country, and the shift is generating controversy both at home and abroad. a major client calls your cellphone and wants answers on what it means for the client's portfolio which had assumed that no major change would occur in this policy area.
The Phone Call: The investment advisor can pull up the chart while talking to a client and provide an immediate, informed view on whether a policy move represents a departure from the norm.
The Client Note: The investment advisor uses the charts as the foundation for an immediate note to clients regarding the current day's newsflow. If the investment advisor also has access to a generativeAI automated research assistant trained on PolicyScope language data, the advisor can as the bot to summarize (i) the current activity and/or (ii) recent past activity and create the first draft of a research note to clients. (NOTE: current industry research indicates that GenAI can also read charts. However, we have not tested the accuracy of that research against PolicyScope data and charts. We have only tested the summarization capabilities).
The Expert Consultation: The investment advisor sends the charts to the internal or external experts that provide perspective on political and geopolitical developments and requests strategic guidance. The investment advisor also asks the experts to provide perspective on most likely developments from this point forward.
The Team Meeting: After lunch, the investment advisor convenes an internal team meeting. The short note and charts distributed to clients is shared with the team. Theya re asked to provide follow up calls to key customers to obtain feedback and determine if additional questions exist.
BCMstrategy, Inc. delivers industry-defining quantitative and language data to help power advanced decision intelligence in capital markets, advocacy, and strategy consulting. The award-winning patented process provides multifactor time series data and structured language data designed from the beginning to support a wide range of AI-powered predictive analytics solutions.
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