Just to pass the time during the quiet period...
Sunday February 6, 2:31 pm Eastern Time
Toronto stock exchange becomes tech stock playground
By Ian Karleff
TORONTO, Feb 6 (Reuters) - Cautious optimism greeted the Toronto Stock Exchange's record surge past 9000 on Friday, with skeptical investors keen to point out that telecommunications heavyweights Nortel Networks and BCE Inc. are responsible for most of the gains.
``Believe it or not: The TSE isn't hot,' read the front page of the Globe & Mail's Saturday Report on Business.
However, over the past year the TSE 300 Index has been transformed from a resource and banking-based benchmark, into a technology play that is undervalued relative to U.S. markets.
``The TSE is absolutely on fire,' said Nesbitt Burns' economist Doug Porter as the TSE 300 was about to close on Friday up 314.81 points, or 3.5 percent, to an all time record of 9209.20.
``What's remarkable is that Canada is massively outperforming the U.S. this year and it's not because of commodities. Instead, the big story here is the spectacular performance of our tech stocks,' he said.
On Friday, 23 of the top 25 net gainers on the TSE were technology related, and all the weekly net gainers were technology, including rising stars like Research In Motion (Toronto:RIM.TO - news) (NasdaqNM:RIMM - news) , Sierra Wireless (Toronto:SW.TO - news) 724 Solutions (Toronto:SVN.TO - news) (NasdaqNM:SVNX - news) and Ballard Power (Toronto:BLD.TO - news) .
Canada's stigma as a resource-based economy might still be accurate but not when it comes to the TSE 300 where banks and all the resources combined comprise less that 30 percent of the index, which is less than technology's overall weighting, said Porter.
At the beginning of 1999, a little more than 10 percent of the TSE300 was rooted in technology, added Porter.
The profit backdrop for equities is still quite positive even in the face of rising interest rates that appear to be coming in measured increments, said Porter.
``10,000 for the TSE might be aggressive, then again with 300-point increases it might not be that far away,' he added.
``We're in the midst of a structural change in the economy, where telecom and the Internet are becoming more and more important.' said Paul Ferley, an economist at the Bank of Montreal.
There is also growing optimism about the overall Canadian economy with Friday's stronger-than-expected employment report suggesting strong growth in the near term, said Ferley.
Big companies like BCE Inc. (Toronto:BCE.TO - news) and Nortel Networks Corp. (Toronto:NT.TO - news) -- among the largest components of TSE 300 index -- are well positioned to take advantage of this economic transformation, said the conservatively optimistic Ferley.
He added, however, that ``There is some concern, given some very rapid increases, that potentially maybe a bubble is forming.'
``This rally is two months long and everyone is calling for a massive correction,' said Brendan Kyne, vice-president of Triax Investment Management Inc. ``I saw this for five years in the U.S., with volatility of course, but I saw it march higher for five years and now I sit back and chuckle. This (TSE 300) is going higher.'
But it's not going to go higher on the back of the old economy -- resources, banks and cyclical stocks -- because the days of indiscriminate buying of the TSE300 are long gone, said Kyne.
``I believe there is a significant shift that's happened in the past 12 months in Canada, and its a permanent shift,' said Kyne, referring to a small number of technology stocks that have pushed the TSE into record territory.
For the past 20 years retail investors have been shifting money from Canadian savings bonds into about 300 Canadian equity mutual funds. This changed a year ago when clone funds were introduced, allowing Canadians to buy foreign markets using derivative-based clone funds, while still adhering to the 20 percent foreign content rule for registered retirement assets, said Kyne.
``Money is going out of Canada and into the international marketplace. The only money flowing into Canada is U.S. money and it's pursuing a very small band of tech stocks.'
In 1999, Canadians withdrew C$157 million ($109 million)
from Canadian equity mutual funds compared with net sales of C$10.2 billion ($7.1 billion) in 1998, while investments in foreign shares -- mainly through clone funds -- surged 36 percent to C$12.7 billion ($8.8 billion) in 1999 from C$9.3 billion ($6.5 billion) in 1998, according to statistics from the Investment Funds Institute of Canada.
Kyne believes the TSE will continue to benefit from a small universe of technology stocks taking on U.S. multiples thanks to U.S. investors. And value stocks will continue to get cheaper as 75 percent of Canada's portfolio managers with value perspectives continue to scratch their heads in bewilderment.
($1 = $1.44 Canadian) |
