Enterprise Software Monthly Report | October

21 October 2022

Enterprise Software ETF Monthly Report: Key Takeaways

  • September lived up to its reputation as one of the worst monthly performers as we continued to see global central banks tightening policy in order to keep a lid on inflation. It seems there is still a widely coordinated global effort to reign in prices through higher rates, largely to the detriment of growth equities. [1]
  • The culprit that stopped the bear market rally in its tracks was the Jackson Hole Conference. An overly Hawkish Powell did his best Volcker impression by expressing that “by any means necessary” we have to put a lid on inflation, and he won’t stop, “until the job is done.” Speaking of Jobs, the Fed later also raised their “natural” unemployment rate expectations to 4.4% from the current level of 3.7%. [2]
  • We are still experiencing the hangover from binging on too much stimulus, and there are three events that need to occur to reverse the Fed’s hawkishness, giving us any reprieve in equities; 1) A Slowdown in growth; 2) Inflation heading towards the long-term target of 2%; and 3) A softer labour market. [3]
  • When it comes to inflation, we are finding that it is now structural rather than transitory. Despite all monetary policy can do on the demand side, the supply side is still yet to make drastic improvements, although we are seeing signs of prices coming down in shipping containers, auto, and housing. We need lower CPI readings to come over the next couple of months to restore any order in the system. [4]
  • When it comes to growth, we believe the next couple of earnings periods will be key to see which companies are hit the hardest and which are able to weather the storm as recession indicators continue to flash red. A soft landing is looking more and more like a fairy tale than it is a reality as Powell expressed that the longer restrictive policy is in place, the lower the likelihood of a soft landing. [5]
 

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

There was too much capital in the system for too long. We should’ve known this when pictures of apes and rocks were selling for millions of dollars, but we also should’ve known this when looking at multiple expansion in high growth technology stocks.[6] The high growth cohort of SaaS based businesses traded up around 40x EV/Revenue in February 2021, down to 20x by May 2021, then back up to 35x in November, and collapse to a through around 8x in May 2022. The multiple now hovers around 11x as a lot of “air” has been left out of the system. [7]

Throughout this sell-off, the higher multiples that investors historically paid get put under further scrutiny as a lot of this growth is dependent on a production function of the underlying growth of every day businesses needing to implement workflow optimization. When the overall economy slows, the growth rate starts to slow in these super-growers in the early stages of their company life. In this environment, we believe it is safer to shorter duration by bringing cash flows forward through increasing exposure to more mature and larger cap companies.

We believe that this fund balances both growth and free cash flow generation in a manner that captures both ends of the spectrum. It is positioned for downside protection through large free cash flow generation, but also due to the rebalancing component captures the upside in beaten down high growth names that have seen sentiment retreat.

 

Enterprise Software ETF Performance (as of 31.09.2022)

 


1M

3M

6M

YTD

12M

SI

Purpose Enterprise Software ESG-S UCITS ETF (Acc)

-9.95%

-3.43%

-32.05%

-46.26%

-50.13%

-50.03%

Solactive Purpose Enterprise Software ESG Screened Index NTR

-9.90%

-3.27%

-31.92%

-46.09%

-49.89%

-49.72%

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 30/09/2022. Please note that all performance figures show net data. 

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