How Investors Can Use Digital Sentiment To Achieve Above-Benchmark Returns
This year is set to be another unusual year for financial markets, as inflationary pressures and recessions continue to loom large. Complex geopolitical situations and supply chain issues are set to only exacerbate these pressing issues.
At the same time, the ongoing scaling of blockchain and DeFi solutions continue to disrupt traditional business models. In such a volatile landscape, rife with risk and uncertainty, investors need to understand market sentiment, conduct comprehensive due diligence and respond with great agility.
In this risk-off environment, investors need to take stock of the main volatility drivers within markets, identifying and considering exposure to key challenges and opportunities.
GameStop two years on
One of the biggest challenges facing investors in 2023 will be delivering above benchmark returns. But to look at this, lets take a step back to the beginning of January 2021 when a group of retail investors largely on Reddit groups banded together to challenge hedge funds focused around GameStock.
Two years on from the short squeeze of the GameStop stock, the likelihood of more meme stock rallies ought not be underestimated by investors. Chatter across online and digital channels will continue to grow exponentially in the path to web 3.0.
The need to monitor these channels for fast moving investment signals in a recessionary environment and volatile financial markets will only increase in importance and relevance for both retail and institutional investors. In this type of environment a companies future can change in an instant, particular if it starts to head downhill.
The need for new perspectives
Traditional macro and micro economic data sets, with their embedded time lags, can’t effectively monitor the changing perception of risk in real-time, not only in the market at large, but also within specific sectors, industries, countries and regions.
In a world where dynamic shifts can happen in an instant, investors need to monitor market momentum changes as they emerge in digital channels to make informed decisions around impact to portfolio valuation; the Gamestop phenomenon demonstrated momentum changes in social media, news, forums and blogs can provide valuable indicators of likely direction of price movement.
Organisations that have yet to embrace monitoring dynamic investment signals are likely to underperform peers who take a 360 degree approach to delivering above benchmark returns for their clients.
The tightening regulatory net
One of the biggest opportunities for financial markets is the intensification of financial regulation, particularly when it comes to crypto. Although it is already a heavily regulated industry, the wide adoption of blockchain, web 3.0 and digital assets by both institutional and retail investors in tandem with major market failures like FTX and the Terra Luna crash are going to attract more attention from regulators.
For example, the UK Treasury has recently made their move on crypto with proposals announced to regulate the industry. These proposals currently covers all cryptoassets which are not currently in scope of the MiCA regulation and if acted on, will expand the Financial Services and Markets Act (FSMA) to include a list of “specified investments” to cover “cryptoassets”.
These factors will significantly alter the risk profile of assets, and therefore returns. Investors need to consider how they assess whether an asset is deemed ‘safe.’ Traditional data alone cannot provide the necessary 360-degree view of the markets that is necessary to monitor and manage risk.
Investors today need to supplement their analysis and due diligence with alternative data sets that monitor investment signals as they emerge in digital channels. Because it is here where the real opportunities can be found.
Marina Goche is CEO of Sentifi
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