Predicting the New (Volatile) Normal: Unpacking Our Investment in Predata
On the eve of Britain’s June 23rd referendum to decide whether the country should leave the European Union, most polls, pundits, and analysts had coalesced around a Remain victory. The following day, the world watched in awe as they were proven decidedly wrong. Some called it a triumph, others a disaster.
We call it yet another exhibition of pervasive geopolitical risk and it looks like there’s more to come.
Broadly defined, geopolitical risk is the impact of politics on markets. It encapsulates the implications of both point-in-time, seismic events like Brexit and the recent Turkish coup, as well as the more subtle trends like the evolving rifts within the UK’s Conservative Party and the increased erraticism of Recep Tayyip Erdogan.
Geopolitical risk has been a familiar foe for energy and mining companies operating on the opaque edges of the world for decades. But, in the aftermath of the 2008–09 global financial crisis, the risk has found a much broader audience as financial institutions and corporates alike increased their investment and operating exposure to emerging markets in the search for growth.
Of course, the high risk/reward narrative of emerging markets is not a new one — emerging market equities have out-performed their developed market counterparts consistently over the past two decades while producing 8% more annualized volatility of equity returns over that same period. What does run counter to the traditional narrative, however, is that geopolitical risk is not just an emerging markets phenomenon. Rather, we find it increasingly coming to bear in developed markets as well and, in many cases, the aftershocks of a US rate hike or Daesh attack across the globe are as substantial and inter-connected as ever before. This shift is driven not only by the tides of globalization but also by systemic changes to the global order: the US is no longer equipped to provide global leadership; low commodity prices have constrained the ability of emerging market governments to satisfy the ever-growing demand for services from their own rising middle classes; and the rise of populism spurred by sluggish job growth continues to accelerate, further empowering fringe candidates to take advantage of disenfranchised electorates.
Increasingly, persistent geopolitical volatility is the new status quo and those that actively manage and trade on risk are taking notice.
UBS’ CIO Mark Haefele recently called attention to this new order within the context of the unfolding events in Europe: “The status quo in Europe is over. We will have to get used to this. Political risk has risen…” His comments echoed the sentiment of a McKinsey report published a few weeks prior in which 84% of the 1,300+ executives surveyed noted geopolitical instability as the key trend shaping global business in the years ahead. This percentage was up from 61% in 2013 and is in stark contrast to the almost negligible number of executives (13%) that have reported taking active steps to address the risk of geopolitical instability to their businesses, which is largely due to the lack of available options.
Historically, those who have wished to manage their exposure to geopolitical risk have had two choices: 1) Buy political risk insurance from a carrier like ACE, AIG, or XL; or 2) Engage with analysts at a political risk advisory firm. While the former has grown from $1.3B to $2.4B over the past five years, these products are used largely for unforeseeable, black swan events. For those actively managing geopolitical risk that is not tied to discrete, rare, and unpredictable events, advisory firms are the choice du jour. But, these firms generally rely upon country experts who source ground data at intervals from a network of contacts with an incomplete scope. This approach made sense in a world of limited, asymmetric data wherein information was exchanged mainly through informal networks, but this paradigm has shifted as computing power has increased and markets around the globe have been lit up by mobile networks, dramatically increasing the amount of explorable data across the digital universe.
An opportunity has arisen for firms purpose-built to serve the unmet need of asset managers and corporate operators seeking to invest in big data techniques for managing and investing in geopolitical risk. Though we have seen new entrants start to corner various portions of the intelligence landscape with both open source and vertical-specific platforms, predictive analytics for managers and analysts evaluating geopolitical risk remains largely unaddressed. This is primarily due to the challenges of curating the diffuse set of signals that trigger geopolitical volatility, understanding the context of these signals, and scaling this context across regions, countries, states, and issues. Asset managers and corporate security officers, which spend billions on third party data annually, continuously struggle to do so while attempting to fill the gaps with analysts prone to bias. This is a patched system in need of an upgrade.
Enter Predata — a predictive analytics platform for geopolitical volatility and intelligence.
Predata condenses data sources from around the web into clear signals for geopolitical risk by monitoring digital conversations across open source social and collaborative media with proprietary algorithms and extracting metadata indicators like interest level and intensity of discussion. These signals, paired with a proprietary event database and machine learning models, are used to predict the probability of events occurring within a 1 to 90 day window, including asset price changes, civil protests, labor strikes, electoral results, and national security outcomes. With Predata, the Director of Threat Intelligence at an oil major with operations in the Niger Delta can anticipate an attack on company infrastructure; a macro hedge fund manager can find differentiated guidance on the Fed’s likelihood of raising or lowering rates; and a Global Procurement Manager at a leading retailer can actively monitor potential disruptions in her supply chain.
Ultimately, Predata enables managers and analysts to be active rather than reactive when managing and trading on geopolitical risk. This is extraordinarily powerful given the current paradigm of largely qualitative input data that organizations are accustomed to receiving after events have occurred. To build something with this level of horsepower, a highly unique combination of skillsets across geopolitical intelligence, data networks, and next generation machine learning was required. We found this combination in Founders Jim Shinn, Andrew Choi, and the Predata team. It’s an inspiring group and one that we are thrilled to support.
If you’re interested in talking predictive analytics and geopolitical risk, drop us a line. We’d love to chat.