“That’s it, I’m out.”
Those were the words relayed to me on a recent trip to Toronto.
The person speaking was a Canadian fund manager. On the other end of the line was a staffer working the sales desk of a Bay Street investment bank. The subject was falling oil prices and more broadly, I suspect, the entire resource sector. By “out” the fund manager meant: “Don’t show me any more of these stocks. Anything but those.”
Investors in resources have been feeling the pain for years. A five year TSX Mining and Metals chart looks like the kind of ski hill you would probably be wise to avoid. Oil is at a five year low. The Financial Post recently noted that Alberta Premier Jim Prentice has been making a lot of speeches of late spiked with words like “consequences” and “prudence”. Canadian newspapers are stuffed with similar cautionary verbiage. “Turmoil”. “Pain”. “A punching bag”.
Some Canadians today might be wondering if the gutting of the mining and metals sector and recent fall in oil prices has a silver lining. I say it does.
Canada’s innovation sectors have been bubbling under for some time now. In fact, some of the most memorable moves in the recent history of the market have come from techs. In 2012 and 2013 there was Vancouver-based security player Avigilon, which took off to more than thirty-dollars after an IPO priced at $4.50. This year, Amaya Gaming spiked after an aggressive move to acquire the company that owned the PokerStars and Full Tilt Poker instantly made it the world’s largest online gaming company. And investors got a taste of Burnaby-based biotech Tekmira’s leadership role in the potentially game-changing field of RNA Interference after the West African Ebola crris. That stock has soared.
The fact is, this generation of tech in Canada doesn’t need your charity, it demands your attention.
In my view, Canada needs to take advantage of the good times to broaden its economy by moving up the value chain. The trouble is, it’s hard to get anyone’s ear when oil is over $100. No, I won’t be calling on various levels of governments to extend a little charity to the tech sector so we can all feel better ourselves. The fact is, this generation of tech in Canada doesn’t need your charity, it demands your attention.
The story of tech as it relates to the overall economy in Canada is one of regional flare-ups that couldn’t scale nationally. Ottawa in its Nortel heyday is a natural example. But that may be changing. Take British Columbia , for instance, where technology generated $23-billion in revenue in 2012, compared to just $10.2-billion for mining and $15.5-billion for construction. More than 84,000 British Columbians now work in the technology sector, that’s more than the number of jobs in mining, forestry and oil and gas combined.
Can tech replace the national energy sector, dollar for dollar? No. But the sector is woefully underrepresented and could provide a buffer against times like these, when the country’s economy feels precarious and exposed.
A pipe dream you say? The fact is, it’s already happening. Canada’s dependence on energy as percentage of its overall economy is declining. Its share of Canada’s GDP was 12% in 1997 and is now under 10%.
Canada is no clearly no petrostate, our economy is far more balanced than that of Russia’s, for instance. But our economy does have a lot in common with Australia, where the heavy dependence on resource-based exports has Morgan Stanley thinking the country might slip into its first recession in more than twenty years. Could Australia have done more to balance its economy during the times when demand from Asia seemed a limitless fountain? Almost certainly. But it didn’t.
Canadians are about to be exposed to the greatest generation of technology companies we have ever produced, and I suspect many will be going public over the next couple years. These aren’t dot-bomb style flameouts or regional niche players. These are companies addressing global markets that have more fans on the international stage than they do here.
Kitchener’s Desire2Learn has nearly a thousand employees and is changing the world of K-12 education, worldwide. Vancouver’s BuildDirect is leveraging its strengths in analytics and in logistical planning to tackle the likes of Home Depot and Lowes in the massive building supply space. Ottawa-based Shopify’s ecommerce platform is used by General Electric, Tesla Motors, Wikipedia, and Amnesty International. Social media giant HootSuite’s product is used by the White House.
The current fall in oil prices has consequences for the entire economy of Canada, but if it leads to an injection of capital into Canada’s tech sector the next time we find ourselves in the same position we might feel a little less turmoil. A little less pain. A little bit less like a punching bag.