Qontigo’s ROOF Scores were created to quantify an investor’s risk appetite. Are they bullish, neutral, or bearish? ROOF is an acronym for Risk-On/Risk-OFF. We produce two variants of the ROOF Scores per market using our fundamental multi-factor risk models:
- The Style ROOF variant maps eight of our fundamental style factors.
- The Sector ROOF variant maps each of the eleven GICS (2018) sectors.
Additionally, both variants incorporate two additional metrics on the recent change in risk in the market. ROOF Scores are computed and available daily. For more information, please download our methodology documents for both the Style ROOF and the Sector ROOF.
We will be using the ROOF Score methodology in our market commentary, as well as including them in our quarterly insight webinars for discussions. Do reach out to your Qontigo representative if you would like more information on the ROOF Scores for your market.
September 21, 2020: Qontigo ROOFTM Score Highlights
Globally sentiment is divided based on specific regional circumstances. The US has a presidential election less than seven weeks away and partisan politics is withholding a crucial fiscal stimulus package. Europe is seeing a resurgence of infections and investors are caught in the headlights of talks of renewed lockdown measures and hopes for a bigger stimulus response. Meanwhile, investors in Asia are focused on news of low US interest rates until 2023 as well as a weakening USD giving them access to cheaper credit to weather the storm.
Whatever the reasons for the delayed stimulus responses in the US or Europe, time is running out soon for both, and investor’s patience is beginning to weaken. They have been holding on to hopes for a long time now and in a couple of weeks will find out from CEOs how much this patience is costing them in terms of missed earnings. Risk-tolerance is weakening, risk-aversion rising, and winter is coming. Read More >
September 14, Qontigo ROOFTM Score Highlights
Key markets of the US, Global Developed, and Japan have slipped into neutral territory this past week. In this state, the equilibrium between risk-tolerance and risk-aversion means that positive news will not act as a big buying trigger, and negative news will not be so easily ignored as in the recent past. In contrast, sentiment in Asia ex-Japan, global emerging, and European markets remained bullish and what is lacking in there is strong positive news to trigger this risk-appetite into buying action. Higher volatility weighed on sentiment this past week and a return to lower levels may result in a return to bullish sentiment in the coming weeks as we saw in late June, but with a historically volatile month of October only two weeks away and the US Presidential election right behind it (7 weeks), time may not be on the side of risk-tolerance and favor risk-aversion until after the elections. Read more >
September 7, 2020: Qontigo ROOFTM Score Highlights
Sentiment declined sharply in all markets we track during the last two days of last week, with only Australia and Japan managing to hold on to a weekly gain. The UK saw the biggest drop in sentiment but remained in the bullish zone as investors’ risk appetite in that market continues to be erratic given the ongoing negotiations with the EU over a post-Brexit commercial relationship.
Last week saw sentiment in the US decline further after falling into the neutral zone the previous week for the first time in 90 days, despite a positive jobs report on Friday and further assurances from the Fed that interest rates will remain low for “years”.
The demand for risk is supported by QE-driven liquidity, improving economic fundamentals, and ongoing pause in the US-China trade war. The supply of risk assets is driven by the highest valuations in decades, rising geopolitical uncertainty, and the need to secure recent performance ahead of a traditionally more volatile Q4. Read More >
August 31, 2020: Qontigo ROOFTM Score Highlights
For 90 consecutive days now, investors the world over have been strongly bullish (thank you Mr. Powell). This is significant on two counts. First, this is by far the longest stretch any single market has been bullish (the previous record was 79 days). Second, this is the first time in our ROOF history (going back to 1997) that all major markets (except China) are bullish at the same time and for that long. As economic uncertainty post-pandemic rises, it seems investors have all reached the conclusion that the safest place to invest, is right behind the Fed.
This past week, sentiment in several markets declined, seemingly headed for the neutral zone. The US has been leading the way so far this year, peaking in early January, bottoming out on March 19, and then having peaks and troughs within the bullish zone for the last 90 days, all of which were mirrored by the other markets shortly thereafter. Last week, the US ROOF Style Ratio dropped below the Bullish zone and into the Neutral zone for the first time in 90 days (see last week’s note). The US Sector ROOF Ratio variant weakened significantly as well despite remaining in the bullish zone for the time being.
The two sentiment variants have a very strong correlation of 0.92 (on a rolling 12-months basis) and the Style ROOF usually leads the Sector ROOF by a week or two. The decline in the US Style ROOF variant since July 13 has been giving a warning signal since August 18. The US Sector variant is now confirming the same warning signal as of July 27. If no (strongly) positive news comes out to lift sentiment, an increasingly negative cognitive bias will make investors more sensitive to negative news and prone to over-reaction on the downside, especially in markets without profit-taking to restrain them (i.e. if news causes downward revisions in expected returns, cut your losses now). Read More >
August 24, 2020: Qontigo ROOFTM Score Highlights
As we exit the Q2 earnings season, sentiment takes a breather. Earnings were good and for the most part better than feared. CEO guidance was positive, but bleak economic data on Q2 and potentially dark geopolitical clouds ahead seems to have curbed investor’s enthusiasm (except in the UK last week). All ROOF Ratios remain in the bullish zone, except China’s, but the sentiment momentum that we observed at the start of the earning season has weakened as company specific news is replaced by geopolitical and macro headlines, increasing the potential for a sharp volatility spike. Declining volatility was the main driver of positive sentiment in Q3. A sudden reversal would be enough to tip sentiment in favor of risk-aversion. At this point, risk-aversion is still well below risk-tolerance in all markets we track (except China), but rising volatility and correlation can put momentum behind a rise in risk aversion, driving risk appetite out of the market very quickly. Read More >