Enterprise Software Monthly Report | February

14 February 2022

Enterprise Software ETF Monthly Report: Key Takeaways

  • The selloff continued throughout January on the back of rising interest rates yet again. Rising rates have an outsize impact on pressuring growth assets like software stocks, since cash flow profiles are pushed out. 
  • The most notable event in January was the Powell press conference on January 26th which was probably one of the most important Fed meetings in recent memory. The market sessions started with the tech-heavy NASDAQ up significantly, only to get sold off during the Q&A session as each answer Powell gave was more hawkish than the previous one. [1]
  • The fed has two mandates - a strong labour market and stable price levels (meaning inflation). Since the current CPI numbers have surged, the fed must raise rates to curb this inflation. However, inflation is a lagging indicator, so the Fed response must be appropriate and very flexible to achieve a soft landing. [2]
  • The reasons for inflation are obvious - people in the US were directly handed cash and there was so much money injected into the system, increasing demand for goods as the disposable income of the average consumer increased drastically. This increase in demand for goods was further fuelled by Covid, and now Omicron, which has shifted consumption to goods even further because no one is spending money on services which have been shut down. [2]
  • On the supply side, we had numerous supply chain issues, the most recent being China's no-covid policy which has shut down entire ports. With both excess demand and lower supply, it’s no wonder we're seeing price levels increase. [3]
  • However, we do believe that omicron will be the end of covid as it moves from pandemic to endemic, and we'll see everything open back up. [4] This will shift demand from goods to services which will put a damper on the demand side of the equation for goods. Additionally, we're seeing that people now must return to work because their level of disposable income is eroding. [5]
  • We will also see supply chains ease. An example of this is that Amazon has spent more in CAPEX in the last 2 years than they did in the last 20 combined. [6] The same is true for Taiwan semiconductors building out capacity over the last 2 years than they have in the last 10 years.  [7]
  • That is an epic supply response to alleviate bottleneck concerns. We do believe that inflation will ease and the Fed will raise rates and incorporate contractionary monetary policy in a flexible manner that will have a soft landing.   

 

Macro Outlook

When we look at the high-growth companies that have contracted, we go back to our fundamental thesis and analysis which has largely unchanged. Can multiples compress a bit further? Absolutely. But these companies are best in class in the most rapidly growing industries. Growth tech did get ahead of itself, and these periods of digestion are needed. Nearly everything switched online over the last year, as many digital transformation trends were accelerated drastically.

Now is the time to get in. With such a rapid overdone sell-off, we believe we are nearing the levelling-off of multiple contraction. At the end of the day, these software companies sell solutions with very sticky recurring revenue, high switching costs, and high gross margins. Software companies typically have little to no debt, and with free cash flow generation, in periods of sell-offs like these, typically go back to market to repurchase shares.

 

Enterprise Software ETF Performance (as of 31.01.2022)

 


1M

3M

6M

YTD

12M

SI

Purpose Enterprise Software ESG-S UCITS ETF (Acc)

-14.97%

-27.64%

-20.39

-14.97%

NA

-20.93%

Solactive Purpose Enterprise Software ESG Screened Index NTR

-14.93%

-27.53%

-20.13%

-14.93%

-9.56%

-20.67%

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Bloomberg / HANetf. Data as of 31/01/2022. Please note that all performance figures show net data.

 

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