Emerging Technology - Canada’s Opportunity

As a resource economy, we polite Canadians need to take a step back and look at how our domestic economy is positioned in the current environment. If we consider that the three out of the ten main sectors in the TSX index (energy, mining and financials) account for roughly two-thirds of the index, it’s easy to understand that we, as a country, are too concentrated.

This concentration might bode well for us in the Great White North when commodity prices are rising and the oil patch is rock n’ rollin’, but in these times when we are reading about a slowdown in China, the collapse in oil prices, record low interest rates, increasing household debt and potential real estate bubbles, the seemingly resilient Canadian economy could be in the middle of a perfect storm. Unfortunately, for deep, structural reasons, our manufacturing sector has been surprisingly slow to recover— despite the drop in the loonie—and we wonder how we as a country can diversify away from such deep, historic concentration in these sectors.

As with our investment portfolios, if countries are too concentrated, we are vulnerable. As we look to opportunities to diversify our economy, we need to look to our rich history in innovation and to leverage our legacy of entrepreneurial spirit through innovation and technology.

After all, we are the country that invented the prosthetic hand (an interesting fact for me, given that I wear one). It was we modest Canadians who brought the world insulin, walkie-talkies, sonar, the electron microscope, the cardiac pacemaker, the garbage bag, plexiglass, the 56k modem, the telephone and, of course, the Blackberry.1 Yes, when we think of technology and innovation in Canada, we think of Blackberry.

With our practice located in Kitchener-Waterloo, we have had a front-row seat to the challenges technology companies face. It has also provided us a unique perspective, direct insight into the domestic talent here and the opportunities that Canadians have throughout the tech landscape. Locally, our economy is much more than the home of Blackberry. Over the past decade, our region has become a technology hub, with hundreds of tech start-ups calling the area home.

We are home to numerous public technology companies including Sandvine, OpenText, Descartes, Perk and COM DEV, to name a few. According to a May 2016 report by CIBC’s Institutional Equity Research team, “Emerging technology in the region is extremely prolific and booming at the moment. The Waterloo Region is seeing a new start-up every single day and all the Blackberry space and people have been fully absorbed by the likes of Google, Kik, Shopify, D2L, eSentire, Miovision and many others” 2.

Growth in the region has been fuelled by the technology space, to the point where the region is having a light rail transit line built to support the growth. In addition to the thriving start-up community, we are starting to see large tech companies moving to the area, including Google, which now calls Kitchener home to their Canadian headquarters.

The CIBC report highlights one of the significant challenges the tech industry is facing--attracting enough talent—but considers that “a leading indicator of a thriving industry is the difficult challenge of finding enough talent”. This fall will see the launch of a Go North/Come Home campaign in global technology centres, aiming to attract talented programmers, engineers and salespeople in a broad range of technologies, to come home from hubs like Silicon Valley, New York City, Chicago and Los Angeles.

The report says, “To facilitate the tech sector’s staffing requirements, government support needs to take place at a much higher level. For context, government support for typical areas of innovation around the world, like Silicon Valley, but also other emerging regions, such as Berlin, Los Angeles and Tel Aviv range from $3 billion to $5 billion annually. This compares to about $1 billion for the Waterloo region in the form of grants, tax credits, investment matching and other forms of funding. In our view, more is needed from the federal and provincial governments in order for entrepreneurs and builders in the Kitchener-Waterloo region to have the tools needed to power Canada’s future and support and foster the knowledge economy.”

We recently witnessed evidence that our government recognizes both the need to diversify and the opportunity. In January 2016, we were fortunate to have a visit from Prime Minister Justin Trudeau here in Kitchener-Waterloo. The premise of the visit was the theme of diversifying our economy though technology investment. 3 After a tour of the new Google Canadian headquarters, the Prime Minister announced that they have put forward an ambitious agenda focused on innovation and the technology sector, seeing technology as the answer to away from our reliance on natural resources as an economy driver.  

As Canadians, seeing this commitment from our government is important; as investors, the support for technology industry will unlock significant opportunities.

True, many investors are still feeling the pain and licking their wounds from the bubble in 2001, but if we take a closer look at markets like such as Ottawa, Vancouver and Kitchener-Waterloo, it’s easy to agree with the article’s comments that, “It’s fascinating to see and important for us, as investors, to understand because today’s start up technology company is tomorrow’s next opportunity.”

Today, we have seen the number of issuers in the S&P/TSX Composite IT Sector Index increase significantly and forward P/E ratios are looking attractive by historical standards.

If history has taught us anything, it’s that we advance through innovation and opportunities uncovered though technology. Bill Gates once said, “Never before in history has innovation offered promise of so much to so many in so short a time.”4 It’s important to recognize this as investors, and as Canadians.

If you are interested in obtaining a copy of CIBC’s report titled Emerging Canadian Tech in 2016, please contact G. Derek Henderson at derek.henderson@cibc.ca.

G. Derek Henderson is an Investment Advisor with CIBC Wood Gundy in Waterloo. The views of G. Derek Henderson do not necessarily reflect those of CIBC World Markets Inc

1.  http://www.mediatrainingtoronto.com/blog/2013/6/29/50-great-inventions-canada-gave-the-world

2.  Emerging Canadian Tech In 2016, CIBC World Markets Institutional Equity Research, May 5, 2016.

3.  Prime Minister Justin Trudeau at the University of Waterloo, in Waterloo, Ont., on Jan. 14, 2016. Nathan Denette / THE CANADIAN PRESS

4.  http://www.hmgstrategy.com/rrc/rfCatIndex.asp?categoryID=11

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