Cunyi Yang from the Sun Yat-sen University (SYSU) – Lingnan (University) College; The University of Hong Kong – Faculty of Business and Economics (et al.) have created a new index, the War Related Diplomatic Sentiment Index (WDSI) as a way of getting ahead of events via official government rhetoric.
There are already a number of global risk indices but most of these are coincident in that they feed from news channels and actual happenings. So they do a good job of telling you where you are, but aren’t so good at the where you might be going next bit.
Using text (or speech) as data isn’t new but the sophistication allowed now by properly wrangled LLMs allows for never-better analysis and the researchers concentrated on China’s Ministry of Foreign Affairs and the U.S. State Department for their raw data.
As both sources are day-to-day chatty it was possible to construct a high frequency index with daily readings. From there a simple matter to map onto events for validation and from there to what will concern most here, capital flows.
Two major findings emerged:
- Greater risk readings tend to send capital away from China. This is most reliably detected in Hong Kong via the Stock Connect where Southbound flows are easy to monitor.
- Higher risk readings though send capital towards U.S. equities. The researchers don’t prove this but intuit this is nothing more complicated than ‘flight to quality/safety’ at work.
So we seem to have one piece of the puzzle as to why, despite a noisy and unstable backdrop for most of this year the U.S. stock market has at the same time progressed to new highs.
Those buying in anticipation of some sort of ‘Peace Dividend’ in due course may therefore be disappointed as capital will likely drain out in the event we transition to more stable conditions.
You can review the work in full here When Words Move Money.
Happy Sunday, and be careful what you wish for.