An Ode to Canada Tech Stocks After $6 Billion in Value Erased

(Bloomberg) -- The best performing sector in Canada has lost its mojo.

After eight straight months in the green, tech stocks are now on pace for their first slump this year with about C$8.3 billion ($6 billion) in market value lost -- making them the biggest losers in September.

The rotation to value from growth sent stocks like Shopify Inc. on its longest losing streak on record. There was also BlackBerry Ltd.’s 30% collapse last week after reporting a massive earnings miss and forecast cut. Shopify makes up a whopping 35% of the S&P/TSX Information Technology Index, while BlackBerry has about a 3% weighting. The slump in FAANG stocks after U.S. President Donald Trump’s negative remarks about the growing power of social media platforms seeped into investor sentiment for Canadian tech too.

“The pace of this recent run in technology stocks, driven in large part by the success of Shopify, was unsustainable, and likely driven in part by short covering,” said Hans Albrecht, fund manager at Toronto-based Horizons ETFs Management Canada Inc. “When that dried up the bottom fell out.”

Was the epic 59% rally into August too good to be true? Sky-high valuations have slipped with the selloff but are still well above the five-year average. Shopify, which has found profit elusive, carries a forward 12-month price-earnings ratio of about 466, according to data compiled by Bloomberg.

The slump may have also knocked Canadian pride down a peg or two. Shopify, along with Lightspeed POS Inc., whose shares have slumped about 38% since hitting a peak in August after pulling off one of the most successful initial public offerings in North America this year, have been held up as exhibit A and B that the country really can do tech.

“Is this the end of the run for tech? Absolutely not,” Albrecht said. Unlike the U.S., Canada has a handful of tech stocks that make up a small part of the broader S&P/TSX Composite Index, pushing valuations up at an accelerated pace. “This year’s run had valuations overextend and invariably investors realize that fundamentals need to catch up at least to some extent.” The tech rally could take a pause for now and push ahead in 2020, he added.

Despite the flight to value this month -- boosting heavyweights like financial and energy stocks -- last week painted a different picture -- stocks snapped their longest winning streak since April and have lost 1.2% amid political turmoil in the U.S. and evidence of slower growth in Europe.

Here’s a look at what happened last week:

Markets -- Just The Numbers

Chart of The Week

Politics

The federal election campaign continues in Canada as party leaders pledge tax breaks, cost reductions and corporate subsidies:

• Prime Minister Justin Trudeau has promised a major personal income tax break if re-elected as he tries to recover from revelations he wore blackface makeup on multiple occasions.
• Conservative Leader Andrew Scheer said he would “fix” the mortgage stress test if elected by reviewing it for first-time homebuyers and removing it from renewals
• Canadian telcos slumped last week as Trudeau vowed to cut wireless services costs by 25% within four years. This came after the New Democratic Party indicated that it would implement price caps on mobile phone and internet services.

Economy

It was quiet on the data front with Canada’s July wholesale sales rising 1.7% to C$65.4 billion, surpassing expectations. The blockbuster figures that economists will be watching out for is July GDP data expected on Oct. 1. This comes ahead of Bank of Canada’s monetary policy decision on Oct. 30.

#TrendingInCanada

1. The global climate strike took place across Canada as protesters pushed politicians to adopt a climate action plan to reduce carbon dioxide emissions. Environmental activist Greta Thunberg joined the march in Montreal on Friday.

Read more: Greta Thunberg Is Right, World Leaders Say, We Are Failing

2. Toronto Maple Leafs star Auston Matthews faces a disorderly conduct charge after he mooned a female security guard in Arizona.

--With assistance from Yueqi Yang and Esteban Duarte.

To contact the reporter on this story: Divya Balji in Toronto at dbalji1@bloomberg.net

To contact the editors responsible for this story: Madeleine Lim at mlim131@bloomberg.net, Jacqueline Thorpe, David Scanlan

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