Financial Times Europe - 04.03.2020

(John Hannent) #1

20 ★ Wednesday4 March 2020


Ewan Kirk


Markets Insight


AngloGold Ashanti,Barrick Gold nda
Newmont ere in demand as the Federalw
Reserve’s earlier than expected cut of its
main policy rate by a half a percentage
point helped pull gold prices higher.
Sectors seen as inflation hedges, such
as utilities and real estate, also turned
higher with mobile phone tower owners
American Tower nda Crown Castle
among the best performers.
But the worsening outlook for net
interest margins from lower rates
weighed on the banks.JPMorgan Chase
andCiti ere among those to retreat.w
ChipmakerAMD ose on the back of ar
Piper Sandler upgrade to “overweight”.
It forecast continued market share
gains fromIntel, saying its chips were
offering the same or worse performance
at higher prices in both the desktop and
server end markets.
Tesla limbed after JMP Securitiesc
turned positive with the broker arguing
that sustainable growth over the next
four to five years justified an enterprise
valuation of 5 times 2021 revenue.
Target aded after the retailer gavef
more cautious 2020 profit guidance.
Stealth BioTherapeutics oubled afterd
US regulators said its lead drug to treat a
rare paediatric heart condition was
eligible for priority review.Bryce Elder


Wall Street Eurozone London


Qiagen ed the Stoxx Europe 600 gainersl
afterThermo Fisher greed at the seconda
time of asking to buy the Dutch
diagnostic equipment maker.
US-based Thermo agreed to pay
$10.1bn, a 23 per cent premium to
Qiagen’s closing valuation on Monday.
Lufthansa ed a bounce among travell
stocks as the US Federal Reserve’s rate
cut encouraged bargain-hunting.
ButThyssenkrupp eakened onw
worries that Covid-19 would stall its debt
reduction plan with NordLB analysts
saying improved dividends looked more
unlikely from the steelmaker in spite of
the recent sale of its elevator division.
Spanish drugmakerPharma Mar
surged after saying it was investigating
whether one of its compounds was an
effective treatment for the coronavirus.
Clariant ose afterr Sabic f Saudio
Arabia, the Swiss speciality chemicals
group’s biggest shareholder, raised its
stake from 22 per cent to 31.5 per cent,
just below the level where it would trigger
a mandatory takeover offer.
AB InBev rifted lower after Bank ofd
America turned cautious on the brewer.
Macroeconomic headwinds and
coronavirus disruption made progress
unlikely against challenging year-on-year
comparatives, it said.Bryce Elder

British Airways ownerIAG as the bestw
performing blue-chip stock.
HSBC, repeating “buy” advice on
airlines including IAG and Ryanair, said it
did not foresee “existential doubt” for the
sector under base-case coronavirus
scenarios.
HSBC,Barclays,Standard Chartered
andLloyds ll slipped as investors priceda
to near-certainty a round of central bank
actions to follow the US Federal Reserve’s
half percentage point interest rate cut.
Wm Morrison ed the supermarketsl
lower after industry market share data
showed it was the laggard among the big
four in February.
4 Imprint, the US-focused promotional
products maker, led the FTSE 250 gainers
after delivering in-line full-year results
and saying rading had been strong.t
EngineerRotork allied after matchingr
expectations with its full-year results as
improved margins counteracted a small
shortfall in sales.
Hunting ell after UBS took the oilfieldf
equipment maker off its “buy” list, citing
lower US shale exploration budgets.
Huntsworth, the healthcare public
relations agency, jumped to its best level
in more than a year after agreeing to a
£400m takeover by private equity group
Clayton, Dubilier & Rice.Bryce Elder

3 Wall Street jolted by a double dose of
policy announcements
3 Lingering coronavirus concerns send
US Treasury yields to fresh record lows
3 Haven asset gold rallies above $1,
an ounce


Markets were buffeted by back-to-back
policy statements yesterday, prompting a
retreat and then spike in US stocks.
Wall Street opened lower after G
officials stopped short of announcing
concrete action to address the economic
impact of the coronavirus outbreak.
Following a conference call yesterday,
the group of nations issued a statement
stating a “commitment to use all
appropriate policy tools to achieve
strong, sustainable growth and safeguard
against downside risks”.
But an hour later, the US Federal
Reserve caught markets off-guard by
cutting its main policy rate by half a
percentage point, its largest cut since
2008, citing “evolving risks” from the
spread of the contagion.
The Fed move came “as a big surprise”,
said Neil Birrell, chief investment officer
at Premier Miton. “Cuts were already
discounted but not so much so soon.”
The large-cap S&P 500 index shot up
after the Fed announcement, only to
retreat 30 minutes later as investors
weighed the impact of the move.
“Interest rate cuts cannot make
factories produce more if they are unable


to source vital inputs from virus-hit
countries,” said Jennifer McKeown, head
of global economics at Capital Economics.
By midday, the S&P 500 was down 1.
per cent while the tech-heavy Nasdaq
Composite fell 1.3 per cent.
European stocks, which had been up
more than 3 per cent, gave up some gains
after the Fed announcement. The Stoxx
Europe 600 closed 1.4 per cent igher.h
Asian markets were also volatile with
early optimism stemming from a Monday
rebound in US stocks fading. Tokyo’s
Topix fell 1.4 per cent, having been up 1.

per cent, while the CSI 300 index of
Shanghai- and Shenzhen-listed stocks
rose 0.5 per cent higher, retreating from a
1.3 per cent rise earlier in the session.
Reflecting the cautious mood, haven
assets rallied. Gold climbed more than 3
per cent to breach $1,600 an ounce while
the yield on the 10-year US Treasury fell 6
basis points to hit a fresh record low of
1.0199 per cent.
Global oil benchmark Brent crude,
which had recently fallen below $50 a
barrel, rose 0.8 per cent to $52.31 a barrel.
Ray Douglas

What you need to know


Treasuries rally after Fed rate cut fails to allay virus anxiety
-year Treasury yield ()

Source: Bloomberg
















Mar Mar





The day in the markets


Markets update


US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 3073.25 1487.26 21082.73 6718.20 2992.90 107101.
% change on day -0.55 1.23 -1.22 0.95 0.74 0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 97.660 1.118 107.555 1.282 6.981 4.
% change on day 0.308 0.449 -0.343 0.549 0.332 -0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.043 -0.627 -0.116 0.387 2.787 6.
Basis point change on day -4.800 0.000 2.490 -1.700 2.400 -9.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 348.05 52.31 47.43 1599.65 16.92 2639.
% change on day -0.16 -0.68 -0.08 -0.63 -1.57 1.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.


Main equity markets


S&P 500 index Eurofirst 300 index FTSE 100 index

| |||||| ||||||||| ||||
Jan 2020 Mar

2880


3040


3200


3360


3520


| |||||||||||||||||||
Jan 2020 Mar

1440


1520


1600


1680


1760


| ||||| |||||||| ||||||
Jan 2020 Mar

6400


7040


7680


Biggest movers
% US Eurozone UK


Ups

Newmont 6.
Trane 6.
Lennar 4.
Welltower 4.
Vulcan Materials (holding ) 4.

Lufthansa 8.
Lindt 5.
Airbus 4.
Novo Nordisk 4.
Telenor 3.

Int Consolidated Airlines S.a. 7.
M&g 4.
Just Eat Takeaway.com N.v. 4.
Legal & General 4.
Evraz 4.
%


Downs

Hanesbrands -6.
Charles Schwab (the) -5.
Svb Fin -5.
Comerica -5.
Raymond James Fin -4.
Prices taken at 17:00 GMT

Seadrill -6.
Thyssenkrupp -4.
Unicredit -4.
Natixis -3.
Societe Generale -3.
Based on the constituents of the FTSE Eurofirst 300 Eurozone

Barclays -2.
Hargreaves Lansdown -2.
Morrison (wm) Supermarkets -2.
Standard Chartered -2.
Hsbc Holdings -1.
All data provided by Morningstar unless otherwise noted.

H


ardlyadaygoesbywithout
investors being told that
artificial intelligence will
revolutionise investment
management. After all, AI
is being hailed as a way to enhance
image recognition, healthcare, movie
recommendations, fake news and even
thehumbletoothbrush.
Surely it is only a matter of time
before AI allows investors to sit at home
getting rich while watching recom-
mendedmovieswithsparklingteeth?
Despite that persistent hype, reality is
different. The best way to distinguish
thetwoistoconsiderwhatAIactuallyis.
It is useful to take any statement using
AIandsubstitutetheword“statistics”.
“The UK government vows to revolu-
tionise the NHS with artificial intelli-
gence” sounds somewhat less trans-
formative when one says: “The UK gov-
ernment vows to revolutionise the NHS
with statistics.” Buying a “statistics-ena-
bled”toothbrushsoundsmoreprosaic.
So how can we expect AI to help the
investment process? The caricature is
that one takes a bunch of data (prefera-
bly newfangled “alternative” data),
throws it at some sort of “neural net”
andoutpopsavaguelydefinedfinancial
gold mine. This misconception drives
seriousstatisticianscrazy.
First of all, machine learning requires
a clear goal. That was whatGoogle’s
legendary AlphaGo programme had
when in 2016 it finallybeata human
championattheboardgameGo.
But what is the goal of finance and
investment? Higher returns over time?
A two-times levered position in the
equities markets will give you two times
the return. Is it higher risk-adjusted
returns? Adding diversifying assets like
bondstoyourportfoliogivesyouthat.
My personal story that illustrates the

pitfalls of AI came in 2010 when I
became interested in genetic algo-
rithms,whichusethepowerofselection
andbreedingto“evolve”.
I wrote a library of functions to evolve
trading systems and allowed hundreds
of thousands of artificial traders to
breed. Eventually I had a huge popula-
tion of artificial traders who were doing
what many quantitative funds have
been doing for decades — which was
preciselynotwhatIwanted.
Consequently, we have to tell the AI
system something like: “Do not find me
the returns that everybody knows
about; just the subtle unknown ones.”

But this is hard to specify. Even if one
can accurately specify the desired
returns,itleadstoasecondproblem—if
the effect is subtle, it is likely to be small
or shortlived and thus hard to exploit at
scale. Across the vast global investment
industry,onlyatinyproportionoffunds
willthereforeeverlikelybenefit.
A third problem is that an AI system
learns from the past. In this respect, it is
no different from any other systematic
ordiscretionaryinvestmentprocess.
But the roblemp with finance is that
thepastisnotagoodguidetothefuture.
To use a statistical term, finance is not
“stationary”. In most AI domains like
movie recommendations and tooth-
brushing, the “target” is stationary and
the environment does not change much
(unlessyou’vehadalotofdentalwork).
This is ot true in finance. There is an

trade-off between reacting quickly to
shifts in markets and believing that old
patternswillreassertthemselves.
While one may wish an AI system to
respond rapidly to events, this eans itm
has to build a model on a very short his-
tory, which reduces the amount of data
that the system can learn from. Tough
choiceshavetobemade.
Finally, financial data is very messy.
Although it is not entirely random, the
signal-to-noiseratiois ow.l
InfieldswhereAIhasbeensuccessful,
this is typically not the case. AlphaGo,
for example, knew exactly where the
pieces on the board were. Nobody
chooses19randommoviesforeveryone
they like and then expectsNetflix ot
comeupwithgoodsuggestions.
Itispossibletousesophisticatedtech-
niques to reduce the effect of random-
ness in finance but it makes it challeng-
ingtoapplymachinelearning.
It is not all doom and gloom. While it
is unlikely that AI will create new scala-
ble sources of returns, it is proving use-
ful in more mundane tasks. AI is very
good at cleaning data and etectingd ea-f
turesingiganticdatasets,forexample.
One technique that has gained trac-
tion is to use the same AI algorithms
usedincomputergamestocreaterealis-
ticNon-PlayerCharacters,likethemon-
sters that try to kill you. These algo-
rithms can approximate how a human
trader would act in particular circum-
stances(withoutkillingyou,ofcourse).
Oncewearethroughthetroughofdis-
illusionment,managers will find many
places where AI can generate marginal
improvements.Buttheywill ecleaningb
theirteethwithanold-fashionedbrush.

Ewan Kirk is founder and chief investment
officer of Cantab Capital Partners, now part
of GAM Systematic

Don’t believe the


hype about AI and


fund management


We have to tell the AI


system something like: ‘Do
not find me the returns

everybody knows about’


MARCH 4 2020 Section:Markets Time: 3/3/2020- 18:34 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR, 20, 1

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