Using Big Data to find Alpha in Asia Matthew Stuart-Box - Portfolio Manager, Scientific Active Equity

24 February 2017

For internal use only

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9.0% 11.6%

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Why look for alpha in Asia ?

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China • S&P: AA- • Pop: 1.37bn • GDP: $11.3tr

India • S&P: BBB- • Pop: 1.29bn • GDP: $2.2tr

Indonesia: • S&P: BB+ • Pop: 258m • GDP: $936bn

Singapore • S&P: AAA • Pop: 5.5m • $294bn

China 19%

India 18%

Indonesia 4%

Pakistan 3% Bangladesh

2%

Rest of AEJ 9%

Americas 13%

EMEA 30%

Japan 2%

ANZ 0%

Asia accounts for more than 50% of the World’s Population

12%

14%

16%

18%

20%

22%

24%

26%

28%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Asi

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rofit

Mar

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%

New- economy sectors

Capital-intensive sectors

Taiwan • S&P: AA- • Pop: 23m • GDP: $508bn

Japan • S&P: A+ • Pop: 127m • GDP: $4.4tr

Australia • S&P: AAA • Pop: 24m • GDP: $1.2tr

Korea • S&P: AA- • Pop: 50m • GDP: $1.3tr

Source: IMF

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Emerging Asia Emerging Europe Latin America G7Source: IMF

Source: IMF

Source: Goldman Sachs. Capital intensive = Oil & Gas, Metals, Mining, Cap Goods, Materials, Telcos and Utilities. New economy = Tech, Software, Semi, Pharma, Media

Philippines • S&P: BBB • Pop: 103m • GDP: $310bn

Source: Latest S&P Rating: Standard & Poor’s. 2016 Population - U.N. Nominal GDP: IMF estimates for 2016

Asia Share of Global GDP

Asia Growth is leading both DM and other EM Regions

Asia Ex Japan Transitioning from Old to New economy

Malaysia: • S&P: A- • Pop: 31m • GDP: $309bn

Thailand • S&P: BBB+ • Pop: 65m • GDP: $409bn

Hong Kong • S&P: AAA • Pop: 7.3m • GDP: $322bn

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Where to look for Alpha?

Company fundamentals Improving & persistent profits

Rising earnings expectations

Attractive valuations

Market sentiment Stocks that are in favour

Measured by the views of other market participants

Analysts / company management / other investors

Linkages between stocks and with other assets

Macro exposures Companies exposed to favourable market and economic conditions

E.g. growth expectations, FX rates, demographics

Common factor in nature — industries, countries, customised baskets

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30 years of experience understanding the drivers of equity returns

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What do we mean by Big Data ?

Source: BlackRock, For illustrative purposes only

Characteristics Large volume

High frequency

Less structured

Crowd sourced

Lots of noise, short history

Digital footsteps

Some examples:

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Example: basic text processing – conference calls, reports

Source: BlackRock, For illustrative purposes only

Blackrock algorithm “reads” over 5,000 earnings call transcripts every quarter

Over 4,000 analyst reports every day

Algorithm turns unstructured text into statistical form that can be used to score and rank stocks

Look at tense and context of the words (past v future) and consistency with other reports

First generation signal used equal weighted sentiment dictionary and this was an effective signal

Next generation signal uses machine learning to learn what word is most relevant for each stock at each point in time

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Example: local language text processing

Source: BlackRock, For illustrative purposes only

Text analysis: the importance of local language processing

Original versions of most broker reports are written in the local language

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Example: management behavior

Source: BlackRock, For illustrative purposes only

Tanshin Text Companies provide a large

amount of commentary on corporate strategy

This can provide early indications of changes in behaviour

For example: increasing chance of stock buybacks

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Example: forecasting tourist arrivals

Real time views of search activity Available from Baidu

Predicts future tourist arrivals from China

Relevant for retail, hotel, consumer services sectors throughout Asia

Source: BlackRock, For illustrative purposes only

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Example: retail investor sentiment

Social media has been a key alpha source

Retail investors account for over 80% of trading volumes in many Asian markets

Over 2 million blog posts per month reveal retail sentiment

Various features of blogs help to predict future returns

Abnormal blog activities are usually followed by reversal

Positive sentiment is good, but consistency matters more

Source: BlackRock as of December 31, 2015, for illustration purposes only; worldcloud as of June 30, 2015

Retail investors sentiment may diverge from analysts Text analysis helps to read investor’s mind

买入 Buy in 强烈推荐 Strongly recommend利好 Good news 欲扬先抑 Price fall before rise上涨 Price increase 正面 Positive news发财 Make a fortune 稳健 Stable垃圾 Garbage 反弹 Bounce back快跑 Run away fast 价格战 Price war骗子 Liar 十分艰巨 Very difficult下跌 Price fall 下滑 Fall down

talking about?What are retail investors

talking about? What are analysts

Source: BlackRock, as of 4Q 2015

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Retail blog sentiment Broker sentiment

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40

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60

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China PMI Economic activity through satellite image

Example: satellite images

Satellite images reveal the “true” activity of China

We get satellite image data daily with on-the-ground activity

Use machine learning to map companies to facilities based on past co-movement

We like companies associated with increasing activities

Economic activity through satellite images reveals more volatility than reported PMI since 2013

Satellite images show real-time facility utilization

Source: BlackRock, SpaceKnow, as of 4Q 2015

Activity through satellite images vs. official PMI

Source: BlackRock, as of 3Q 2015

Map companies to facility locations

High Utilization Rate

Med Utilization Rate

Low Utilization Rate

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Example: ETF liquidity demand

Source: BlackRock, Bloomberg. Data as of January 2015 Graphic shows ETFs (red dots) linked to underlying holdings in European stocks (yellow dots). Sample restricted to 115 ETFs with AUM in excess of $500m and 356 stocks with aggregate ETF holdings above $100m.

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2007 2008 2009 2010 2011 2012 2013 2014 2015

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Trading days (event = 0)

etf outflow

Sample stock, net ETF flow as % total volume The ETF Ecosystem

Extreme flow event study returns

ETFs

Stocks

Holdings

Source: BlackRock, Bloomberg as of May 2015

For use with institutional/professional and qualified investors only — proprietary and confidential

Source: BlackRock, Bloomberg as of January 2015

Decomposing the underlying drivers of net flows can help identify market imbalances that mean-revert

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Example: employee sentiment

Source: BlackRock, For illustrative purposes only

Employee sentiment and management quality

Employee sentiment can be measured from anonymous social media postings

Employee’s view on culture, management, opportunities

Positive employee sentiment can lead to higher productivity

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Summary

Source: BlackRock, For illustrative purposes only

More data is available for investors than ever before Online, social, mobile sources of information on human activity

To extract value from this data requires a combination of ideas and new techniques Natural language processing

Image, voice recognition

Machine learning

Cloud computing

This is especially attractive in Asia Local languages

Retail investor activity

Weak company disclosures

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Important Disclosures

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FOR PROFESSIONAL AND INSTITUTIONAL INVESTOR USE ONLY – NOT FOR PUBLIC DISTRIBUTION (PLEASE READ IMPORTANT DISCLOSURE)

This material is issued by BlackRock Asset Management North Asia Limited for distribution to professional and institutional investors only and should not be relied upon by any other persons. This material is provided for informational or educational purposes only and does not constitute a solicitation of any securities or BlackRock funds in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

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