Enterprise Software Monthly Report | May

06 May 2022

Enterprise Software ETF Monthly Report: Key Takeaways

 

  • April was one of the worst months in years for major indices. The NASDAQ fell 13.3% in April, its worst monthly performance since the financial crisis in October 2008,[1]  The S&P 500 sank 8.8% for its biggest monthly drop since the onset of the pandemic roiled markets back in March 2020. [2]
  • The dominating narrative over the month was incredible bearish sentiment, as the AAII survey produced one of its most bearish readings in decades.[3] Primary sources of the pessimism include the fear of a recession and continued supply chain constraints through the Ruso-Ukraine War and COVID-19 shutting down entire cities in China, ultimately driving inflation higher. [4]
  • It all comes down to expectations. A lot of macro-economic conditions become self-fulfilling expectations when it comes to prices and inflation. These expectations have now shifted to “higher for longer” for inflation which should force the Fed’s hand into a rate-rising cycle over the coming months, which would be prohibitive to overall equities, but particularly painful for growth equities specifically. [5]
  • On top of this, the most recent U.S. GDP numbers have come in and have shrunk for the first time since the pandemic, contracting 1.4% in the first quarter vs. consensus of +1.1% and +6.9% in Q4.[6] The surprise was exacerbated by a widening trade deficit reflecting supply chain problems, as well as lower private inventory investment and fading government stimulus spending.
  • 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.
  • High growth and momentum names continued to be an area that investors are using as a source of funds as broad-based multiple compression continues.

Please note that all performance figures are showing net data. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. 

 

 

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 part of 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. [7]

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. [8]

 

Enterprise Software ETF Performance (as of 30.04.2022)

 


1M

3M

6M

YTD

12M

SI

Purpose Enterprise Software ESG-S UCITS ETF (Acc)

-17.04%

-22.84%

-44.17%

-34.39%

NA

-38.99%

Solactive Purpose Enterprise Software ESG Screened Index NTR

-16.98%

-22.72%

-44.00%

-34.26%

-30.92%

-30.92%

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 30/04/2022. Please note that all performance figures show net data. 

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