Enterprise Software Monthly Report | August

08 August 2022

Enterprise Software ETF Monthly Report: Key Takeaways

  • July proved to be another volatile month, with the month ending on a strong note as risk assets across the board got a bid. July was the best month for the S&P500 since November 2020 as the market tried to answer the question of the sell-off, “When do we reach the period of enough is enough?”.[1] For the month, the Dow gained 6.7%, the S&P 500 gained 9.1%, and the NASDAQ rose 12.4%.[2] Despite the July rally we still have heavy losses on a YTD basis as recession, inflation, and rate hiking fears lurk in the shadows.
  • Many also are now debating whether this rally is more of a short squeeze + a bear market rally or we will have more of a sustained bounce, with many thinking the former rather than the latter.
  • The main driver of the rally was potential light at the end of the tunnel when it comes to the fed backing off on aggressive rate hikes, and the Fed meeting coming out as a bit more dovish than anticipated. [3]
  • The end of the month saw a stacked line-up when it came to the earnings schedule with all the megacap majors reporting in the same week. Expectations had set the bar incredibly low as recessionary fears were mounting as well as concern over the impact on lower growth rates. However, the theme over the earnings period was “better than feared” as earnings were not yet severely impacted, and guide-downs were slightly better than expected.
  • We also got a litany of economic readings at the end of month from GDP, Household income, spending, PCE inflation, durable goods orders and new home sales. The theme across these readings was that we are starting to see more and more “cracks in the system” as economists debate when we will go into recession, or whether we are already in one or not. It seemed to be the case of “bad news is good news” where when we get weak economic readings, it may give the Fed permission to have slightly more accommodative fiscal policy.
 

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

Software has been an area that has experienced immense selling pressure lately, leading to drastically compressed multiples. We know that capital was rotating out of riskier assets on the back of “higher for longer” rates, the fear of recession, the spike in commodity prices, and the flight to safety in a time of heightened geopolitical risks. Although we firmly believe the multiple compression was drastically overdone (from ~30x EV/Revenue to 10x), the largely unanswered question was the earnings period.

The main thesis for buying software companies over the most recent leg of the bull market was because these companies were highly scalable from a recurring revenue perspective, had high gross margins, and once mature, could reinvest cashflow to “land and expand” into other verticals through M&A and other capital allocation strategies (around R&D and S&M).[5] These sky-high valuations were being held up by the narrative of extremely strong future growth. So, the software companies entered the confessional having to maintain growth rates. How did they do?

On average, software stocks held up very well. We had the thesis going into earnings that software would be more resilient in a downturn, and we were right as software continues to look like one of the last areas where growth rates will persist. There will be periods of slight growth through elongated sales cycles and shorter contract life, but variable cost structures should leave bottom lines relatively preserved as we move through this stage of the cycle.

 

Enterprise Software ETF Performance (as of 31.07.2022)

 


1M

3M

6M

YTD

12M

SI

Purpose Enterprise Software ESG-S UCITS ETF (Acc)

8.46%

-8.01%

-29.02%

-39.65%

-43.50%

-43.88%

Solactive Purpose Enterprise Software ESG Screened Index NTR

8.52%

-8.00%

-28.91%

-39.52%

-43.22%

-43.60%

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 31/07/2022. Please note that all performance figures show net data. 

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