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Canada’s Tech Sector Is Booming

Toronto

Canada’s stock market has been giving investors little to cheer about. The Toronto Stock Exchange (TSX) has remained in the doghouse for what seems like an eternity, with the S&P/TSX Composite Index (SPTSX), the Canadian equivalent of the S&P 500 Index (SPX), expanding an anemic 15 percent over the past decade compared to a 114 percent gain by its American counterpart.

That huge underperformance has been occasioned by a terrible energy bear market, with the energy subindex on the S&P/TSX Composite dropping by a third over the timeframe.

The current year has not been much kinder to the TSX, with a paltry 0.42 percent year-to-date gain a clear testimony to that.

But the market is still far from being all gloom and doom.

Canadian tech stocks have been really killing it, putting together a performance that’s reminiscent of the BlackBerry heyday. The S&P/TSX Composite’s Technology Index has climbed 23 percent YTD, leaving its American peer Technology Select Sector Fund’s (XLK) 8.7 percent gain in the dust.

The Canadian tech index though has only 11 members compared with 49 for its energy peer making it hard for its splendid performance to lift the entire benchmark.

(Click to enlarge)

Source: MarketWatch

Canadian tech stocks can thank strong US demand for everything from office software and cloud services to shopping and e-commerce. Related: Strong U.S. Dollar Attracts Fresh Safe Haven Bids

Canada’s Amazon, multi-channel commerce platform Shopify Inc., has run riot, leading the charge with a 45.7 YTD return. The stock has now enjoyed a nine-fold surge since its 2015 IPO.

Meanwhile, Constellation Software Inc., shows no signs of taking a breather from a torrid rally that has seen the stock climb 43.8 percent YTD and 700 percent over the past five years.

Constellation has a robust history of delivering profits to shareholders and has lately gone on an acquisition spree to expand its already highly diversified business.

(Click to enlarge)

Source: Google

High Foreign Exposure

But it’s not just nimble upstarts that are running the show.

Shares of CGI Group Inc., a 42-year old global IT consulting and systems integration company, are up 22 percent YTD and 270 percent over the past five years. CGI has the biggest weighting of the tech index 23 percent. Shares of 45-year old telco takeover target, Mitel Networks Corp. have the second-best gain, while those of 35-year old supply chain management software provider Kinaxis Inc., are up 17 percent YTD.

So what’s the secret sauce for Canada’s tech industry? Foreign exposure.

Related: Is The U.S. Planning To Leave The WTO?

More than half the companies in the tech index derive at least 40 percent of their revenue in overseas markets thus allowing them to double-dip into different markets and revenue streams  and spread the risk. Foreign markets contribute 71 percent to Shopify’s topline while for Kinaxis Inc. and Constellation Software the metric is 94 percent and 50 percent, respectively.

Not all foreign markets are desirable though as evidenced by the poor performance by many American chip stocks due to their high exposure to the volatile Chinese market as recurring trade spats between the two countries continue weighing.

True Innovation

But can these good times last? Not for everyone, according to portfolio manager at Fidelity Canada Asset Management, Mark Schmehl, who sees only truly innovative companies like Shopify being the most likely to continue outperforming.

As for those long-held fears that critical tech talent shortage and immigration to the south would stymie the sector, that probably won’t happen.

Canadian programmers and IT professionals are staying put and choosing Waterloo and Toronto over Silicon Valley, with the federal government making it worthwhile with incentives like the new $1.26 billion Strategic Innovation Fund.

By Alex Kimani for Safehaven.com

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