The recent frenzy for U.S. tech stocks has made it difficult for Canadian IT to get noticed.
With the market fixated on the runaway gains in U.S. media and online giants, the tech sector here at home has been thoroughly overshadowed.
But recent advances in emerging sectors such as artificial intelligence (AI) and blockchain technology have a renewed sense of optimism taking root in Canada.
"What I love about what's going on right now is that there is a swagger that is finally coming to fruition," said Ron Shuttleworth, a partner at Oak Hill Advisors, which provides capital-markets advisory services mostly for Canadian tech firms.
Of course, the domestic tech sector will never come to rival Silicon Valley and its consumer-focused behemoths. More likely, the promise of Canadian IT lies where it always has: behind the scenes.
"We work well on the business-to-business side of things – that's what Canadian tech is good at," Mr. Shuttleworth said. That category includes most of the established public tech sector as well as the nascent AI and blockchain industries, he added. "It's in the tech stack just below the consumer. We are not a consumer-oriented market."
The two markets have followed very different trajectories since the tech bust of the early 2000s. Up to that point, they flew at a similar altitude, at least superficially.
"In the 1990s and 2000s, the U.S. and Canadian technology sectors displayed similar performance, index domination, and breadth of constituents," wrote Vincent Delisle, a portfolio strategist at Scotia Capital, in a recent report.
By the end of the 1990s, the tech sector accounted for 35 per cent of the S&P 500 index and more than 40 per cent of the Toronto Stock Exchange. Of course, Canadian tech was almost singularly driven by Nortel Networks Corp., which at its peak represented almost a third of the TSX.
Then Nortel led Canadian investors headlong into the tech wreck, as the company's share price declined from a July, 2000, peak of more than $120 to less than $1 a little more than two years later.
Canadian IT never really recovered from the bursting of the tech bubble.
Money managers and equity analysts fled from the small-cap space in general and tech in particular. And spurned Canadian retail investors swore off technology indefinitely. "It made it a lot harder for companies to scale up," Mr. Shuttleworth said. "They lost institutional support."
By the time the global financial crisis hit, there wasn't much of a mature Canadian tech sector left. The number of stocks within the S&P/TSX composite index sank to as few as five in 2009.
"Our portfolio managers tend to stick with what they know, and they know oil and gas, financial services and metals," said Tom Liston, managing partner with Toronto's Difference Capital Financial Inc. and a former technology equities analyst. "It's a lot of work to figure out who is truly differentiating in tech."
It has been a much different story in the United States.
While the U.S. technology sector also suffered mightily in the early 2000s, falling by more than 80 per cent from peak to trough, institutional and retail investors were quick to look for opportunities when the market bottomed out.
That nurtured the next generation of technological leaders, which are seen today among the biggest listed companies in the world. Within the S&P 500 index, the five largest stocks are Apple Inc., Alphabet Inc., Microsoft Corp., Amazon.com Inc. and Facebook Inc., collectively commanding $3.3-trillion (U.S.) in market value.
Every one of those stocks has increased by at least 30 per cent year to date, giving a pretty strong indication of what investors have homed in on of late. And it's not a trend that plays to Canada's strengths.
"We believe the shift in U.S. technology leadership to media, online, and smartphone domination highlights the recent challenges of the TSX technology universe," Mr. Delisle wrote. "Canadian technology performance has been uneven since the start of the 2009 equity bull market."
The cross-border tech gap has widened since 2012, as BlackBerry became a shadow of its former self while U.S. tech leaders established their dominance.
But there are signs of life in Canadian tech.
Fund managers have recently started sinking money into companies involved in blockchain, the technology underpinning cryptocurrencies such as bitcoin. There are, however, concerns that the craze for everything and anything blockchain has the makings of a speculative bubble in a little-understood part of the market. "The jury is still out on if most of these companies will ever generate significant revenue," Mr. Liston said.
As for AI, Canada has a real shot at becoming a global leader, he said. But most companies are still funded by venture capital and there are no real pure-play stocks for investors to buy into.
Although AI and blockchain have yet to mature in the public sphere, they share a common thread with more traditional Canadian tech success stories in that they are all essentially focused on business-to-business, Mr. Shuttleworth said.
The year's best-performing tech stock in the S&P/TSX composite index – Shopify Inc., which provides software for retail merchants – falls into that category. As does every other IT name in the main index, for that matter.
And for them, things are looking up as well, Mr. Delisle wrote. The long stretch of outperformance of growth-style investing, which has helped fuel gains in the biggest, buzziest U.S. tech stocks, could soon come to an end as central banks start to reduce stimulus, he said.
The change in monetary policy "will trigger a shift toward value-style leadership, and we expect U.S. technology domination to lose momentum."