Canada Markets closed

More love for tech sector in 2013?

Canada's technology sector is expected to see further strength in 2013 as the U.S. and Chinese economies pick up steam, lifting share prices of companies that make and provide services for gadgets that are big and small.

The sector, which accounts for a tiny 1.4 per cent of the benchmark Toronto Stock Exchange's S&P/TSX composite index, is a cyclical group, which means its fortunes are generally tied to the broader economic outlook.

In the U.S., a string of recent data has shown key sectors such as employment and housing are healing, while optimism about a rebound in China's economy and its boost to resources is also lifting sentiment.

"We've been fans of technology in the past and we continue to be fans of technology going forward," says David Andrews, director of investment and research at Richardson GMP.

"Our recommendation for technology stands because we do think there will be a cyclical recovery. We anticipate that to continue in the new year."

The Canadian tech sector will be driven by global demand, which should drive up valuations. As well, for the past several years companies have resisted the urge to upgrade systems, noting consumer technology has largely taken the spotlight. This year may be the one that enterprise spending takes hold, says Andrews.

"We think there will be more emphasis on enterprise or business spending, and companies should do relatively well," he said.

Tech stocks saw a boost last year. The top 35 technology issuers ranked by market capitalization saw their share price appreciate by 31 per cent, according to recent data by TSX operator TMX Group, which also runs the smaller TSX Venture Exchange.

More than half of these companies saw their share price increase by over 20 per cent and only seven saw their share price dip in 2012, Kevan Cowan, president, TSX Markets and group head of equities, said in a recent release.

As well, technology companies at different stages of growth had strong access to capital throughout 2012, with issuers raising $1.3 billion of new equity capital in over 55 financings.

There are just over 170 technology companies listed on TSX and Venture Exchange with a combined market capitalization of over $45 billion as of Dec. 31.

Thanos Moschopoulos, a tech analyst at BMO Capital Markets, said if key macroeconomic hurdles can be overcome then companies may benefit from better tech spending.

"I think 2013 will be a good year for the Canadian tech sector," he said.

"Valuation for most Canadian tech companies remains depressed relative to what we've seen historically in a healthy economic climate so I think in most cases there's room for valuation multiples to expand as the recovery takes further hold so that should benefit these companies," he said.

However, key risks to the market outlook remain. Market strategists and economists warn the recent deal to avert the so-called "fiscal cliff" was only part of the equation, and there would likely be more political wrangling over spending cuts and debate about the so-called debt ceiling.

Moschopoulos also stressed company-specific factors play a big role in the performance of tech companies, driven by very specific factors related to niche products and services.