Enterprise Software Monthly Report | June

13 June 2022

Enterprise Software ETF Monthly Report: Key Takeaways

 

  • The story in May was one of recovery. Heading into mid-May we were coming off the worst monthly performance in April since the financial crisis in October 2008. May saw major indices snap a long series of weekly losing streaks.[1] By mid-month we had seven consecutive down weeks in a row. Such a negative weekly stretch has only occurred three times since 1950.[2] The second half of the month saw sharp gains as major indices rebounded from an overextended sell-off.
  • The dominating narrative during the month was a bear market rally, and some of the sell-off starting to look overdone. Interest rate and inflation expectations have spiked since November 2020, causing a very steep multiple compression across all growth equities. There comes a point when multiple compression has to ease – and it looks like we hit this point in May. [3]
  • Now – the primary concern has shifted as the market is baking in a “higher for longer” rate environment, and all eyes are on the prospects of entering a recession.[4] This upcoming earnings period will prove critical in showing which companies are able to maintain revenue growth, and just how much inflation is squeezing the bottom line of companies. Slowing growth could mean trouble for the high multiple cohort while the market shifts focus entirely towards profitability. [5]
  • When it comes to inflation, if we are reaching peaking levels of inflation, the Fed will have permission to signal a pause or ease in interest rate hiking trajectory which could alleviate pressure on growth assets.[6] We still need more data and visibility into just how and when inflation will be peaking.
 

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

Technology companies are not magically insulated businesses that are immune to recession. The number one thing to keep an eye on is a slow in growth. We have seen a slowdown in consumer internet, we get cycles in semiconductors as capex buildout fluctuates, but currently, we are not seeing as drastic of a slowdown in software companies which is what will dictate the picture going forward. [7]

The ETF is setup with a laser focused on the cloud opportunity. If you look at just the infrastructure component of the market, the major players are growing an average of 40% YoY from a base of $180B on an annualized revenue run rate. When we tack on the tertiary companies in the space, the revenue quickly gets into the $300-400B range and is only growing. There is enough room here for a lot of companies to have high growth. [8]

Software it is anti-inflationary by nature, especially in a tight labour market, because it increases the productivity of the average worker. On the Microsoft Call, Satya Nadella came out and said that he has not seen this level of demand for automation technology to improve productivity, because in an inflationary environment, the only deflationary force is software. [9]

We believe the winning strategy from here is to own the companies that are extremely cash flow generative, will not need to go back to the market, and have massive cash balances in order to buy back their own shares, but also to pursue strategic M&A to slot in application software companies in order to grow their TAM.

 

Enterprise Software ETF Performance (as of 31.05.2022)

 


1M

3M

6M

YTD

12M

SI

Purpose Enterprise Software ESG-S UCITS ETF (Acc)

-8.53%

-24.44%

-44.09%

-39.99%

NA

-44.19%

Solactive Purpose Enterprise Software ESG Screened Index NTR

-8.59%

-24.39%

-43.98%

-39.90%

-35.14%

-43.96%

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 31/05/2022. Please note that all performance figures show net data. 

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