News & Research

Time for our quarterly review of the ROOF portfolios, the sentient investment strategies built from our ROOF Score sentiment indicator. In this note we will discuss the performance of both the US and European portfolios in Q3 as well as year-to-date in 2023.

US market risk inches up as stocks waver; Large Caps outperform in Developed Markets but underperform in Emerging Markets; Sharp decline in Japanese stocks drives jump in risk.

Treasury curve inversion lessens after stronger-than-expected jobs growth; Strong oil price fluctuations raise portfolio risk

Investor sentiment had a muted reaction to the previous’ week’s avoidance of a US shutdown and better than expected Chinese PMI data. Sentiment ended the week bearish in global developed markets, strongly negative (and almost bearish) in the US, Europe, and Japan (despite a still weakening USD/JPY), and neutral (but weaker than last week) in Asia ex-Japan, global emerging markets, and the UK.

No market remains in strong-form efficiency all the time. Investment decisions are based on forecasts about the future, which implies a certain degree of error – the so-called ‘known unknowns’. But when the macro situation becomes highly uncertain, the size of the errors around those forecasts increases, and conversely, confidence in them decreases. During these periods, when markets adopt a weak-form efficiency, human emotions start to dominate decision-making, especially when faced with new, negative, and unexpected outcomes – the so-called ‘unknown unknowns’.

Currency risk fell as US dollar strengthened; US Dollar’s strength drives high return for Exchange Rate Sensitivity; Short-Horizon model has risk down over the quarter, but the trading horizon model shows an 18% increase.

The Magnificent Seven (Amazon, Apple, Google (Alphabet), Meta, Microsoft, Nvidia and Tesla) make up more than a quarter of the US market, and their stellar performance has driven the US market’s outperformance so far this year. But this overblown market concentration is unsustainable and may result in a swift reversal, exposing investors to greater risk. Investors have been in a tough spot this year, having to choose between partaking in the extraordinary returns of the Magnificent Seven and avoiding the risks that come with an over-concentrated portfolio. Here we look at the impact of the Magnificent Seven on the US market through the lens of ten charts.

Bund curve inversion lessens over downward inflation surprise; Higher-for-longer rates lift dollar to 10-month high; Stronger FX fluctuations offset lower equity volatility, keeping portfolio risk stable.

Risk management solutions can deliver a myriad of quantitative reports at any level and users often get bogged down with very detailed statistics about all aspects of their strategy, bypassing the important insight provided by summary metrics on their portfolios.

We love data. Our clients love data. But when it comes to truly understanding the risk-reward trade-off of an investment strategy, sometimes the devil isn’t in the details. In a whitepaper, “What are the odds?: Getting a better read on portfolio risk-return metrics”, we advocate for spending more time with the portfolio summary metrics as the first port of call, before jumping in headlong into more granular statistics.

Investor sentiment saw a late week rebound in all markets we follow, except in Japan and global ex-US markets where it remained unchanged (China was closed on Friday). Concerns about the slowing global economy were made worse in the last two weeks, by worries about a potential US government lockdown and slowing Chinese manufacturing activity.

Investor sentiment was mostly unchanged last week, except in the US and Global Developed markets where it worsened, reaching bearish levels. In China and Emerging markets, sentiment improved further, turning bullish in the former, thanks to better manufacturing PMI data for August and talks of a third stimulus package by the authorities.