MARKET INSIGHTS

Tech-tonic shifts in Canadian stocks

May 21, 2020

Canadian tech’s share of the equity market has grown, while energy and other resources sectors have dwindled. But Canada’s sector compositional shift to tech is still nascent. Kurt and Daniel discuss the importance of looking globally for secular-growth themes.

Statistics Canada’s (StatsCan) Labour Force Survey released last week for the month of April revealed that the Canadian economy shed another 2 million jobs and the unemployment rate rose by 5.2 percentage points to 13%, the largest monthly increase on record. The cumulative impact of Covid-19-related shutdowns – when including Canadians who are either unemployed or working significantly fewer hours – is 5.5 million or 22% of the working-age population. Encouragingly, almost all (97%) of the newly unemployed in April expect to return to their jobs once the shutdowns end.

While the outbreak has undoubtedly brought significant disruptions to Canadian businesses, the impact across sectors and industries has been uneven. For jobs where working from home is the norm and close physical contact is not required to carry out one’s responsibilities, employment losses were much less severe, according to StatsCan. For instance, in industries such as public administration, finance, as well as professional, technical, and scientific technology, total hours worked fell between 5-15% since the pandemic started in February. On the flip side, the number of hours worked in the food and accommodation industry fell a massive 60% since February.

The ability to adapt to workplace disruptions and potential to benefit from changing consumer/business behaviour has made tech companies standout performers throughout the pandemic. Last week, the tech-heavy Nasdaq Index once again turned positive for the year. Similarly, Canadian tech returns have been nothing short of impressive, with the S&P/TSX Information Technology Index up 36% on a year-to-date basis, grossly outperforming any other sector (see chart below). The prospect of an accelerated digital transformation and more rapid shift towards online shopping is showing up in asset prices and earnings projections. Since the start of the year, long-term (3-5 year) earnings growth estimates have actually risen for Canadian tech stocks while falling for every other sector (see chart below).

Canadian equity sector returns, year-to-date 2020

Chart: Canadian equity sector returns, year-to-date 2020

Source: BlackRock Investment Institute with data from Refinitiv Datastream, as of 8 May 2020.
Notes: We use total returns in local currency for the S&P/TSX Composite Index (TSX) and its representative sectors. Past performance is not a reliable indicator of future results. It is not possible to invest directly in an index.

Change in long-term earnings growth estimates, year-to-date 2020

Chart: Change in long-term earnings growth estimates, year-to-date 2020

Source: BlackRock Investment Institute with data from Refinitiv Datastream, as of 8 May 2020.
Notes: We use long-term (3-5 years) consensus estimates from IBES for the S&P/TSX Composite Index (TSX) and its representative sectors. Healthcare and real estate are excluded due to the limited availability of long- term estimates. Forward estimates may not come to pass.


Importantly, the information technology sector has risen to account for nearly 9% of the Canadian equity market, up from a mere 2.4% five years ago, and is now almost as large as industrials. This is, of course, related to one specific strong outperformer. Last week, Shopify briefly dethroned RBC to become the largest publicly traded Canadian company, making up 5.5% of the total S&P/TSX Composite Index (TSX) market cap and over 60% of the tech sector. At the same time, natural resources have dwindled in share due to the persistent underperformance of energy and industrial commodities. Financials have held relatively firm, remaining the largest sector and a consistent staple of the Canadian stock market (see chart below).

Canadian equity sector weights, 2010-2020

Chart: Canadian equity sector weights, 2010-2020

Source: BlackRock Investment Institute with data from Refinitiv Datastream, as of 8 May 2020.
Notes: Sector weights are based on the S&P/TSX Composite Index. It is not possible to invest directly in an index.


Although the domestic equity market composition has notably evolved to become less resource intensive and more tech friendly, the universe of secular-growth themes is still nascent in Canada. Compared to the broader developed world, the Canadian equity market remains relatively concentred from both a sector (nearly 60% of the TSX is energy, materials and financials) and single-security (as already mentioned, recent tech-sector gains have been principally driven by a single company) perspective (see chart below). While many Canadian cities stand out as emerging centers for tech talent, this has not translated into the growth of domestic large-cap public companies. Lastly, exposure to healthcare companies is virtually nonexistent within the TSX, since the handful of businesses that make Canada’s small healthcare sector are focused on cannabis.

Canadian sector weights vs. broad developed markets, 2020

Chart: Canadian sector weights vs. broad developed markets, 2020

Source: BlackRock Investment Institute with data from Refinitiv Datastream and MSCI, as of 8 May 2020.
Notes: The chart compares sector weightings of the S&P/TSX Composite Index (Canada) vs. the MSCI World Index (developed markets). It is not possible to invest directly in an index.


From a tactical perspective, we emphasize building resilience in portfolios at a time of high economic uncertainty and financial market volatility. Investors can achieve greater resilience by holding benchmark allocations in government bonds, a preference for the seniority of corporate credit in the capital structure over stocks, higher quality companies within equities, and securities with best-in-class sustainability ratings. We recently upgraded our view on U.S. stocks, in part due to the heavy exposure to quality and secular-growth companies within the technology, communication services, consumer discretionary and healthcare sectors.


Kurt Reiman
Kurt Reiman
Senior Strategist for North America, BlackRock
Kurt Reiman, Managing Director, is a member of the BlackRock Investment Institute (BII) and Senior Strategist for North America. In this role, Kurt contributes to the ...