Kim Bolton, president and portfolio manager at Black Swan Dexteritas

FOCUS: Technology stocks

MARKET OUTLOOK:

Inflation has been the number one topic in the U.S. economy for all of 2022, and it's the reason consumer sentiment has moved down to levels really only seen at the depths of recessions or bear market lows. The U.S. Fed kept its benchmark interest rate at zero as y/y CPI crept above 5 per cent, then 6 per cent, then 7 per cent, and it wasn't until CPI crossed 8 per cent that the first hike occurred in March. We've seen y/y CPI remain above 8 per cent since then, and the Fed has responded with back-to-back 75-basis-point hikes to get the Fed Funds Rate up to the current 2.25-2.5 per cent range with another 50 to 75 basis points (bps) of tightening expected later this month.

Aside from last month's jobs report, we've seen a steady number of disinflationary readings over the last month or two. Last month's CPI number actually showed a slight m/m decline, and another flat reading is currently expected for the August number that's due out in a couple of weeks. Barring another big spike in costs that would go against everything we've seen recently, we think a range of 0.0 per cent to 0.4 per cent for m/m headline CPI over the next year is reasonable. If CPI were to remain unchanged and stay at 0.0 per cent m/m, we would see y/y CPI quickly fall to 3 per cent by next March, and it would be down to 1.36 per cent y/y by next May.

If we saw a constant 0.1 per cent m/m move going forward, we'd see y/y CPI down in the 2-3 per cent range by next May. A 0.2 per cent m/m move for CPI would cause the y/y reading to dip to 2.2 per cent by next June, while a 0.3 per cent m/m reading gets y/y CPI down to 3.3 per cent by June.

What this means is that while y/y CPI remains sky-high right now, barring any big surprises, we could see it get back down in the 2-4 per cent range sometime next spring or summer. At the same time, current Fed Funds Futures pricing has the Fed Funds Rate projected to be just under 4 per cent from next March through July when y/y CPI could easily already be back down in the 2-3 per cent range. Earlier this year, we heard a lot of talk that we've never seen inflation come back down from such elevated levels without the Fed hiking rates above y/y CPI. This could happen by next spring without the Fed having to hike past 4 per cent. Chair Powell and Co. have certainly done plenty of hawkish jawboning lately, but as long as m/m inflation readings stay around or below 0.3 per cent over the next 6-9 months (which we think is a reasonable expectation based on recent data), y/y CPI will be back down to more normal levels and actually below where futures pricing projects the Fed Funds Rate to be.

With the stock market a forward-looking mechanism, we'd expect it to start acting more positively than it has lately if we see this type of path for CPI play out. That is if it's not also projecting an economy that's going to be significantly weaker than it is now. It's hard to argue that the recent pullback since mid-August has been anything other than Fed/inflation driven given how much Treasury yields have spiked. A stock market falling due to weaker economic expectations should coincide with lower Treasury yields instead of the higher yields we've seen over the last few weeks.

Your Black Swan Dexteritas [BSD] portfolio management team is very constructive on the stock market’s performance for the remainder of 2022. The markets will need major participation from its largest sector – the technology sector – when this rebound starts to unfold.

We remain confident our portfolio management tools can generate annualized returns in excess of 8 per cent for the BSD Fund, and achieve the performance expectations of our customized Separately Managed Account clients.

TOP PICKS:

Atlassian (TEAM NASD)

• TEAM is a software company that provides solutions to enhance productivity within technical and business teams. The company’s product offerings can be broadly divided into 3 areas – project management and support; collaboration; and software development lifecycle tools. Importantly, TEAM's tools do not solve specific technical problems, but rather help teams work more closely together. They have had excellent traction among developer teams, the company’s primary market. Meanwhile, IT support teams also represent a fast-growing opportunity, and TEAM has begun selling into business teams (i.e. outside of tech) as well.
• TEAM’s unique GTM approach will enable it to further disrupt the market for issue and project tracking developer tools. JIRA Software has a near-dominant competitive position and plenty of growth ahead. Rapid JIRA Service Desk growth will continue, with significant share gains. And while in the early days, our analysis shows that even minimal information worker penetration for TEAM’s Trello and JIRA Core products will be a needle mover for the company. We expect to see material longer-term operating leverage as the company continues to scale and move further upmarket.
• Fiscal F4Q22 Results: TEAM reported a strong quarter with revenue of $759.8M (+36 y/y) besting consensus by 5 per cent and coming in well above management's guide for $710M - $725M. Subscription revenue led the beat and was driven by sustained momentum in Cloud (+55 per cent y/y) and strong Data Center demand (+60 per cent). A strong cloud net expansion rate of 130 per cent (140 per cent for large customers) was a key contributor to cloud growth while a step down in loyalty discounts in both Cloud and Data Center offerings (starting July 1) also contributed to the outperformance. TEAM grew its customer base by 8,048 net adds, consistent with 3Q's 8,054.

Mastercard (MA NYSE)

• Mastercard Incorporated, a technology company, provides transaction processing and other payment-related products and services in the United States and internationally. It facilitates the processing of payment transactions, including authorization, clearing, and settlement, as well as delivers other payment-related products and services.
• Mastercard put up solid results, comfortably beating consensus and assuaging fears of a consumer spending in the near term. In addition, Mastercard expects continued improvements in cross border volumes, particularly in travel
• Guidance: In terms of forward-looking commentary, management indicated that they generally expect a modest improvement in cross-border travel vs 2019 levels as well as resilient consumer spending for 2H 2022. On rebates and incentives, MA noted that the mix has not yet returned to historical levels, particularly on cross-border, and the company expects to see some benefit of that come through rebates and incentives.
• Looking ahead, while macro concerns around consumer spending remain, we continue to view Mastercard as well positioned given the remaining leverage to the recovery in cross border and the internal hedge of higher inflation vs lower consumer spending

SAP SE (SAP NYSE)

• SAP operates as an enterprise application software company worldwide.
• The company operates through three segments: Applications, Technology & Support; Qualtrics; and Services. It offers SAP S/4HANA, an ERP suite with intelligent technologies, such as artificial intelligence, machine learning, and advanced analytics
• SAP SuccessFactors Human Experience Management provides cloud-based solutions, such as a human resources management system for core HR and payroll, talent management, employee experience management, and people analytics; and intelligent spend management solutions, including products branded under the SAP Ariba, SAP Concur, and SAP Fieldglass names.
• The company also provides SAP customer experience solutions; SAP Business Technology platform that enables customers and partners to extend and customize SAP applications in a cloud-native way; and SAP Business Network that enables companies to extend their ecosystem, react to supply chain disruptions, discover new trading partners, and find new opportunities.
• We believe SAP has a diversified cloud portfolio that is likely to show resilience during a macro downturn given its product breadth and ability to drive efficiencies for its customers. Management also noted that it can flex costs as in prior downturns and highlighted scope of saving in the triple digit millions.
• SAP lowered its 2022 adjusted profit outlook to between 7.6 billion and 7.9 billion euros, from a range of 7.8 billion to 8.25 billion euros. SAP, however, affirmed its revenue outlook.

PAST PICKS: October 20, 2021

Monday.com (MNDY NASD)

• Then: $367.63
• Now: $111.84
• Return: -70%
• Total Return: -70%

Taiwan Semiconductor (TSM NYSE)

• Then: $115.59
• Now: $79.20
• Return: -31%
• Total Return: -30%

Global-e Online (GLBE NASD)

• Then: $64.85
• Now: $29.41
• Return: -55%
• Total Return: -55%

Total Return Average: -52%