With the giants of U.S. technology monopolizing investor attention, there’s a quieter tech sell-off shaping up right here at home.
Since Facebook Inc. shocked the market last week by downgrading growth expectations, investors have become increasingly concerned about the path ahead for the much-vaunted and richly valued FAANG group of stocks.
The resulting flow of investors out of those stocks has intensified over the past few trading days, spreading through the broader tech sector and spilling across the border into Canadian tech stocks.
Within the S&P/TSX Composite Index, the information technology sector has lost 10 per cent from recent highs, while some of the biggest Canadian IT listings, such as Constellation Software Inc. and Shopify Inc., have declined by 15 per cent or more over that time.
“The question on everybody’s mind is, ‘Is the tech run over?’” said Peter Hodson, founder of 5i Research Inc. “When investors see the U.S. guys selling off, and they have big gains on the Canadian names, it’s not a big surprise to see the sell-off carried across the border.”
There’s a good reason that the domestic tech rout has gone largely unnoticed – the sector is utterly dwarfed in size by the mighty FAANG group, which includes Facebook, Amazon.com Inc., Apple Inc., Netflix Inc., and Google-parent Alphabet Inc.
The S&P/TSX Composite Index IT sector includes just a dozen names, accounts for 3.9 per cent of the index and adds up to about $100-billion in market capitalization, which is less than the amount that was wiped from the valuation of Facebook alone in a single trading day last week.
“There are not a lot of people following Canadian tech in the public markets,” said David Barr, chief executive officer of Vancouver-based PenderFund Capital Management, an active investor in Canadian technology. “Most Canadian investors probably haven’t realized anything was going on.”
Until peaking a little more than a week ago, Canadian tech had gained 40 per cent as a sector over the prior year. The biggest stars included Shopify, which nearly doubled over that time, and Constellation Software, which advanced by close to 70 per cent.
As with their U.S. counterparts, Canadian tech stocks in general have become uncomfortably expensive for some investors.
“It’s a space where we are incredibly cautious right now,” Mr. Barr said. “I consider the risks of that high enough that we have very little exposure to large-cap tech.”
In some of the funds he manages, Mr. Barr said he has reduced his weighting in Canadian technology to less than 20 per cent from 50 per cent.
And yet, since Canadian technology began to correct, the broader market for domestic equities has been relatively resilient, with the S&P/TSX Composite Index declining by 1.2 per cent – a reflection of technology’s minimal influence in Canada, where the banks and resources still dominate public markets.
The weighting of tech stocks within the S&P 500 Index, by contrast, is about 26 per cent, meaning the sector’s fate can have considerable sway over the market in general.
That raises the concern that a downturn in U.S. tech stocks could accelerate, triggering the next big stock-market correction.
In that kind of environment, Canada’s limited direct exposure to technology would offer little protection from broad market losses.
“When people get nervous like this, it can create additional selling pressure,” Mr. Barr said. “People could try to flee ahead of the potential contagion of a tech meltdown.”