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 to a risk-tolerant or risk-averse strategy and derives a score for the aggregate risk appetite based on the active return of each strategy.
- The Sector ROOF variant maps each of the eleven GICS (2018) sectors to a risk-tolerant or risk-averse strategy and derives a score for the aggregate risk appetite based on the active return of each sector portfolio.
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.
April 6, 2020: Qontigo ROOFTM Score Highlights
Investors in every market we cover are less bearish than a week ago, and this across both variants of the ROOF methodology (style and sectors). Interestingly, Europe is the least bearish in both. This may be related to the shape of their pandemic exponential growth curves which have started showing signs that the preventive measures are working. This in turn seems to have indicated a light at the end of the tunnel for investors in other market whose curves are not yet showing signs of success. In the absence of factual fundamental data, time, seems to have become the main forecasting tool. A shortterm lockdown means the current stimulus packages will be enough to prevent a depression (not a recession mind you). A longer-term lock-down, means more help may be needed. For now, it seems, investors are betting on a short-term period. In the coming weeks, they will hear about the rest of the year directly from CEOs; their guidance will be key in restoring risk appetite for a sustained rally. Read More >
March 30, 2020: Qontigo ROOFTM Score Highlights
The help helped. Central banks around the world dusted off their printing machines in a historical effort to try and keep businesses afloat until the temporary lockdown on the economy is lifted. This helped sentiment improve in all markets we track except Australia, China, and Emerging Markets. Overall investors remain bearish (ROOF Ratio <-0.5) in anticipation of strongly negative economic data over the next few weeks and the inevitable prolongation of the current shutdown measures in key markets. Pandemic curves have not yet started to flatten out except for China and South Korea, but Risk Aversion curves have pulled back from their last week highs as investors assess the size of the stimulus packages versus what will be required to prevent the global economy from falling into depression. Now that we have seen investor’s behavioral response to the global health crisis, the next few weeks should start to give us a glimpse of what their fundamental response to economic data will be. Brace for impact. Read more >
March 23, 2020, 2020: Qontigo ROOFTM Score Highlights
Investor sentiment continued to deteriorate last week reaching levels of risk aversion not seen since the global financial crisis of 2008, the European debt crisis of 2011, or Q1 2016. This much negative confirmation bias clearly points to investors believing the situation will worsen in the short-term. At these levels, the ROOF ratios indicate that any positive news – from regulators or central banks – will fall on scared deaf ears. Meanwhile any negative news – of which there continues to be plenty – will provoke an immediate negative over-reaction, again. The correlation between the rise in new confirmed cases and the rise in investor’s risk aversion level ranges between 0.87 to 0.95 in the major markets we track (See blog post on the subject here >). This relationship is unlikely to change until the pandemic curves in the major markets starts to flatten, as they did in China and South Korea. Even then, uncertainty will only come down once credible forecasts on the impact of this pandemic on the economy can be fully evaluated. Read more >
March 16, 2020: Qontigo ROOFTM Score Highlights
The ongoing coronavirus pandemic is not (yet) a financial crisis, but it is a crisis of confidence (and leadership). Investor sentiment in all markets ended last week in bearish territory. Simply put, economic and corporate earnings forecasts made just three months ago need to be shaved by a full quarter, probably two, or possibly three, depending on how long the necessary measures put in place to stop the spread of the virus take to be successful. Given this level of uncertainty and the magnitude of the potential revisions, it has become very hard for investors to pinpoint a fair valuation level they can have any confidence in. If the news continues to confirm investor’s bearish bias, they will continue to over-react to it. It will take a full cycle of reliable positive news (i.e. declining number of new cases) for them to return to even a neutral confirmation bias. Only then will over-reaction to negative news stop, and a cycle of rational response begin. Until such time, forecasting markets’ direction is nothing more than mathematical gymnastics. You might as well try the old Greek method of divination by picking a line from the Iliad at random and see what light the legendary Homer sheds on it. Read more >
March 9, 2020: Qontigo ROOFTM Score Highlights
For weeks now, ROOF Ratios have acted like a smoke alarm whose job it is to let people know when and where there is a fire, not how to evacuate the building. For the first three weeks of February, markets treated signs of rising risk aversion as aberrations; lightning from a clear blue sky. In the three weeks following this cognitive dissonance, they have gone from cocky ignorance to miserable uncertainty, as if the virus itself had come to skewer their hubris for attempting to make a positive forecast. This week’s ROOF ratios don’t seem to say that the situation is completely hopeless, but they don’t seem very hopeful either. Perhaps it is ‘regret’ that they point to now? Psychologists describe regret as an emotion born from experience (i.e. having invested when risk was high, and confidence was low) that leads a person to avoid punishment in the future (i.e. don’t do that again!). If this is true, it may take more than a few sanitizing days for the balance between the demand and supply of risk assets to return to equilibrium. Swiss Franc, and the Japanese Yen) as sentiment continues to weaken across all markets. Read More >
March 2, 2020: Qontigo ROOFTM Score Highlights
ROOF Scores to Markets: “Stop telling lies about us and we’ll stop telling the truth about you”. The age-old question of which came first, investor sentiment or market moves, has finally been answered. After three consecutive weeks of denial, markets succumbed to sentiment last week in quite a spectacular fashion. But, if the (SARS) past is any guide to our future, we may not be done yet. There will be the inevitable denial of the denial (a.k.a. dead cat’s bounce), and only then (if Elisabeth Kübler-Ross has anything to say about it), acceptance. Yes, central banks will inject the monetary equivalent of Prozac into the system but what they will not add is earnings and cashflow. And so, while they wait for Wall Street’s scribblers to crunch the new numbers, investors cram into whatever haven they can find (a.k.a. Gold, USTBs, the Swiss Franc, and the Japanese Yen) as sentiment continues to weaken across all markets. Read More >