November 30, 2023
We examine five essential ways in which sentiment analysis enriches fundamental decision-making processes.
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Fundamental investment, which traditionally relies on in-depth analysis of macroeconomic, sector, and company-level data, is now increasingly assisted by quantitative insights. Known as "quantamental", this approach injects the results of large-scale data models, like sentiment analytics, into discretionary decision-making processes.
In this post, we explore five ways in which sentiment can enhance fundamental decision-making.
Inflation still threatens to erode asset strategies, so shielding against it is key for portfolio managers. Yet, relying only on historical data limits the ability for fundamental investors to react to fast-moving signals and surprises.
Quantamental approaches leverage real-time, sentiment-driven inflation insights to actively manage asset allocation in inflation-vulnerable environments without waiting for the release of official figures.
Research demonstrates that thanks to the timely nature of news-based insights, sentiment-based strategies outperform models solely reliant on historical inflation data.
Traditional fundamental analysis can sometimes overlook rapidly-changing market sentiment that can increase market volatility. By incorporating news and sentiment-based quantitative insights, investors can better anticipate surprises and prepare for market shifts.
For example, quantamental signals can assist in forecasting equity market volatility and improving beta forecasts.
News-based signals such as controversy scores or company news can also shed light on market behavior, including the spillover effect from firm-level news to broader market drivers. This information is valuable for portfolio managers to manage risk and build more robust portfolios.
Forex markets respond to a multitude of economic and geopolitical factors. For instance, the Russian invasion of Ukraine led to the exclusion of the Russian ruble from global trade. Moreover, the rising inflation has spiked interest rates, creating new carry trade opportunities.
As FX markets become increasingly volatile, sentiment emerges as an effective layer in amplifying FX futures strategies.
Sentiment insights from macroeconomic and forex news can aid fundamental analysis and enable predictive FX strategies.
Because they depend on historical data and various, often lagging economic indicators, traditional economic nowcasting models often struggle with timeliness, and fail to provide real-time insights into the dynamic economic landscape.
Quantitative approaches leverage advanced analytics from the systematic processing of unstructured data to capture actionable macro insights such as nowcasts for the US or China.
Models that incorporate sentiment analysis into the nowcasting process have been proven to significantly improve the timeliness and accuracy of the models by up to 70% for the US GDP, for instance.
Geopolitical concerns, trade wars, and climate change risks have all been contributing to increased volatility in commodity markets, which also offers opportunities for traders.
While traditional fundamental analysis concentrates on supply and demand, sentiment analysis adds a dynamic dimension to the understanding of these markets.
Sentiment data from news and social media has proven helpful in building effective commodity trading strategies: it has demonstrated its capability to predict the direction of commodity markets.
The integration of sentiment analysis into traditional fundamental investing empowers investors to navigate the complex landscape of finance with greater agility and foresight, helping them make more informed, timely, and risk-aware decisions. Explore the many ways to leverage quantitative insights for discretionary trading with RavenPack Factors.
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