Enterprise Software Monthly Report | March

17 March 2022

Enterprise Software ETF Monthly Report: Key Takeaways

  • The pressure on growth assets continued through February on the back of a risk-off environment due to the conflict in Russia/Ukraine. Rising rates have added to this pressure, having an outsized impact on growth assets like software stocks, since cash flow profiles are pushed out.
  • We believe the conflict in Russia/Ukraine has broad reaching implications in an increasingly connected globalized world. The needless act of Russian aggression is being met with harsh criticism as well as sanctions from major countries across the world. What this is creating is; 1) A risk-off tone in the equity markets and 2) even higher for longer inflationary periods than originally forecasted from Covid fallout.
  • If we look at commodity prices, they are all starting to skyrocket. We already had strenuous supply chain conditions on the back of Covid – as reflected in spiking cargo prices. Now, since Russia is a Major export of energy to Europe, we are seeing sanctions cause commodity prices to skyrocket. Its not just Oil & Gas. Russia and Ukraine together also account for roughly 1/3rd of the world wheat production, which effects a lot of consumer price levels for goods. [1]
  • What this increase in inflationary pressure will do is start to create problems at central banks. Inflationary concerns are usually met with an increase in interest rates to limit price levels. However, since the last expansionary cycle brought interest rates close to zero, central banks have not had time to increase rates ahead of this recent correction.
  • In all this uncertainty, it looks as though the possibility of a recession has drastically increased over the last couple of weeks. These fears and the overall risk-off tone appears to be having outsized impacts on growth assets that push cash flows to future dates.
  • Growth equities have largely benefitted from over a decade of easy monetary policy with widespread GDP growth. This has been a period of high growth, with very low inflation. We are now seeing the opposite. GDP growth appears to be slowing while we have higher for inflationary readings, leading to the possibility of the dreaded “S” word…Stagflation.
  • However, we believe that software names are now approaching multiples where the setup over the coming months could be a generational buying opportunity. There comes a point where the contraction has to revert – and we believe this will come in Q2 of 2022.

 

 

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 28.02.2022)

 


1M

3M

6M

YTD

12M

SI

Purpose Enterprise Software ESG-S UCITS ETF (Acc)

-6.60%

-26.01%

-30.71%

-20.58%

NA

-26.15%

Solactive Purpose Enterprise Software ESG Screened Index NTR

-6.57%

-25.91%

-30.52%

-20.52%

-18.90%

-25.88%

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 28/02/2022. Please note that all performance figures show net data.

 

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