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A man reacts after reading a newspaper headline reporting on the US-China balloon incident at a stand in Beijing on February 6. Photo: AP
Opinion
The View
by Richard Harris
The View
by Richard Harris

Investors should learn to spot the news narratives that move markets

  • Narratives like ‘zero-Covid’ or ‘Russian invasion’ act as powerful forces on markets; mining them for key data can help investors stay on top of trends
  • Even using internet tools to monitor the frequency and correlation of key words found within news narratives can give investors clues about their future impact
Richard Harris
Richard Harris
Why you can trust SCMP

“On Wall Street today, news of lower interest rates sent the stock market up, but then the expectation that these rates would be inflationary sent the market down, until the realisation that lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an overheated economy would lead to a re-imposition of higher interest rates.”

New Yorker cartoonist Robert Mankoff wrote this in 1981 and it remains a classic because it’s funny – and it’s true. Stock markets thrive on news and narratives. Harsh winters in coffee growing areas; climate change flooding mines; the ballooning US-China relationship; Putin and the oil price; and “Happy Hong Kong” are all examples of narratives that move markets.

It follows that within the front-page narratives of the chattering classes, there is information that we could mine to forecast where prices may possibly go. Narratives are the voice of the market.

This is “narrative finance”, a term that I coined for my newly completed PhD studies. Narratives transmit the disruptive forces from news events through the market and inspire investors to shift asset prices. Information is embedded within the text and speech of the legacy narrative.

There is the dominant narrative; for instance, Covid-19 restrictions damaging the economy, or Russia blocking natural gas exports to Europe – both of which are likely to cause inflation. Then there are dormant narratives; those that lie waiting to pop up if sparked by the right news event.

My research sought to extract information from nebulous, hazy narrative. To do this, I analysed the crashes of the two Boeing 737 MAX 8 aircraft in 2018 and 2019 that caused 346 deaths. They provided a case study of two events with one cause, but different narrative outcomes.

The first crash, involving Lion Air flight JT610 from Jakarta to Pangkal Pinang, Indonesia, demonstrated the power of the early Boeing-inspired narrative that implied Indonesia was a dangerous place to fly. The chairman of Lion Air even had to go into hiding until Boeing reluctantly admitted that the crash was due to a design fault.
Traders on the floor of the New York Stock Exchange (NYSE) on March 18, 2019, as Boeing experienced a drop in shares. Photo: AFP

The story then switched to that of the ability of the impeccable 100-year-old Boeing Company to quickly fix the problem. The dominant narrative moved into business as usual – and the share price resumed its status quo.

The second crash in Ethiopia was shock news, the kind of event that people remember, because it was caused by the same software error. The dominant narrative of “business as usual” was replaced by the dormant “design fault narrative”.

Its re-emergence seriously damaged the reputation, not only of Boeing but also of the Federal Aviation Administration, who delayed grounding the aircraft. The share price fell 11.2 per cent in two days and cascaded downwards for five months to 24 per cent lower than before the first crash.

The sub-narratives progressively layered upon each other, each taking their toll, from the loss of life to the cost of grounding, the rising corporate debt levels, reputational risk, and regulatory incompetence that came close to damaging USA Inc. itself.

One narrative irony was that Ethiopian Air was held up as a beacon of air safety in Africa, in contrast to the media treatment meted out to Indonesia’s Lion Air. In fact, the recent accident records of the two companies were similar.

The data extraction was carried out by painstakingly counting the frequency of the sub-narratives in contemporary media, to plot the waves of the narrative signal as it flowed through the market.

Tracing the relative frequency and magnitude of key words from news headlines provided an indication of the importance of the news to the market. The narrative signal was compared to the movements of the share price; the two unsurprisingly correlated very well, proving that narratives move markets.

A shock event often leaves investors in a quandary about how to trade. Narrative data provides an indication as to whether the news is likely to lead to a simple narrative, where the share price returns to performing as before, or whether there is a possibility of progressively worsening news, when investors should sell.

01:57

Boeing 737 MAX resumes passenger flights in the US after 2-year suspension

Boeing 737 MAX resumes passenger flights in the US after 2-year suspension

Just after the second Boeing crash, the especially high frequency of the word “share” in news stories not only indicated the big fall in the share price but also that falls could continue to occur – as they did for the next five months.

Any PhD research into a new area of investment will tantalisingly skim the low hanging fruit, leaving tempting targets higher up the narrative tree. New technologies in artificial intelligence and machine-driven narrative tools (such as ChatGPT) are ideal for modelling information from the legacy narrative at high speed for real-time decision-making.

Time to replace stock market gambling with truly responsible investment

Even today, narrative analysis is available to anyone. Long-term readers of this column will recall that last February, I wrote that the frequency of the search words “Russia” and “Ukraine” on Google Trends had developed an extraordinary correlation, pointing towards an increased probability of an invasion – something which transpired two weeks later.

It is unlikely that we will ever be able to demonstrate Faustian skills of prediction from any financial analysis technique. However, narrative finance can help investors narrow the probabilities in nowcasting and forecasting models, bearing in mind that good judgment remains paramount.

In the sound words of the market adage: “there are no professional investors, the best are merely gifted amateurs”.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness

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