Tech Stocks Are Killing It in Canada

(Bloomberg) -- Canadian technology stocks are trading near a decade-high as they ride booming U.S. demand for everything from e-commerce to office software and stay far from the global trade fray.

The S&P/TSX Composite’s technology index has gained about 23 percent this year, trouncing the 6.1 percent rise of its nearest competitor, industrials. Tech now sports a 4 percent weighting in the benchmark equity index, the highest since 4.2 percent in 2009 when BlackBerry Ltd. ruled the smartphone market.

“I don’t see why this trend would stop," Todd Coupland, an analyst at CIBC World Markets, said in an interview. “Those businesses are growing faster than the average company and it’s attracting investment. Whether it’s e-commerce or social or enterprise cloud, those are all very well-established trends and look to have significant possibilities."

E-commerce company Shopify Inc. is leading the charge with a 62 percent advance this year, followed by Mitel Networks Corp., the takeover target of a U.K. private equity firm. Constellation Software Inc.’s share price crossed C$1,000 ($750) in May as it continues its acquisition streak and cloud-services company Kinaxis Inc. is up 17 percent in 2018.

While Shopify’s nine-fold surge from its 2015 initial public offering hogs headlines, CGI Group Inc.’s steady climb to record highs has given the 42-year-old services provider a market value of C$23.9 billion and the biggest weighting in the index at 23 percent. BlackBerry Ltd. made up 84 percent of the index in 2009 but takes only 7.3 percent now. Still, the index only has 11-members compared with 49-member energy index, so it has done little to boost the benchmark, which is flat on the year.

Brian Belski, chief investment strategist at BMO Capital Markets, said companies with high foreign-revenue exposure have been outperforming domestically focused companies and that means tech and industrials.

“We believe the passage of U.S. tax reform and the associated surge in U.S. growth are likely the main drivers,” Belski wrote in a note earlier this month. Outperformance should continue as long as the U.S. leads global growth, despite ongoing concerns about the North American Free Trade Agreement, he said.

More than half the companies in the tech index get over 40 percent of their revenues from the U.S., including Shopify with 71 percent, Kinaxis at 94 percent and Constellation Software at 50 percent, according to data compiled by Bloomberg. And the tech sector has escaped the tariffs that the U.S. has slapped on Canadian steel or aluminum.

Truly Innovative

Mark Schmehl, a portfolio manager at Fidelity Canada Asset Management, is skeptical these companies will continue to soar.

“When I think about technology, I think of innovative companies doing new things,” he said. “Shopify qualifies, but it is the only public Canadian company that I can really think of that does this at any size."

Schmehl is more excited about the private tech space where venture-capital investment ballooned 11 percent to C$3.5 billion in 2017, according to a report by the Canadian Venture Capital and Private Equity Association and U.S. companies including Alphabet Inc.’s Google and Amazon.com Inc. are expanding in Canada.

There’s been few initial public offerings of any Canadian-based companies in the tech sector in recent years. Real Matters Inc. had a C$157 million offering in April, 2017. Schmehl sees that changing.

“I think that several of the more mature private companies in Canada could go public and do just fine," Schmehl said, declining to name any targets. "I think that our public equity markets could be better if we had more technology in the benchmarks."

©2018 Bloomberg L.P.

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