Canadian Software stocks are looking good, this Scotia advisor says

The market turmoil continued this week as investors ran for cover amid not just a rout in tech stocks but a general market downturn. But though it may be a while before sectors like software recover, you’re likely to do well in the long term by picking up some of your favourite Canadian tech names right now on the pullback. That’s the advice from Scotia Wealth manager Greg Newman, who thinks investors ought to be looking at the bigger picture rather than fretting over day-to-day market moves.

“In bear markets, the assets that lose least win, and we’re either in a bear market or a bear patch,” said Newman, senior wealth advisor at Scotia Wealth, speaking on BNN Bloomberg on Friday. “And if we can use that to buy in when things are down 20, 25, 30, 35 per cent then we can really benefit on the other side.”

It’s definitely a TGIF-type of day, as many investors will be looking forward to some peace and quiet on the long weekend after enduring another spate of the market’s dramatic ups and downs — and they’ve mostly been downs. The S&P 500 looks to be ending the week on a bum note, with losses of over four per cent in the past five trading days, bringing the year-to-date to a frightening loss of almost 20 per cent. 

Here in Canada, the results have been different, with the S&P/TSX Composite Index up a percentage point over the past week and the year-to-date sitting at a much more comfortable five per cent loss. Strong energy stocks have had a lot to do with the relative outperformance of the Canadian markets, while it sure hasn’t been tech that’s kept the boat afloat, as stocks like Shopify and Lightspeed Commerce have been subjected to 78 per cent and 62 per cent drops in value, respectively, over the past six months. The rout has even hit more venerable names in Canadian tech like Constellation Software and OpenText, both down by double digits this year. And, perhaps the most glaring number, the TSX Information Tech Capped Index is down a full 36 per cent for 2022. 

All that gloom is set against a current backdrop where it’s unclear when the pain will end, as central banks have given little to signal that interest rate hikes will be over soon and inflation keeps snowballing seemingly by the week.

But Newman says the prudent move at the moment is to think about deploying cash into hard-hit areas of the market and then wait for the downturn to end.

“A [market] cycle end would be when we go into a recession, which technically the definition is two quarters of negative growth. And if that’s the case, stocks typically go down. And if you start buying in there or wade in there the payoff period is a year – maybe it’s a really stubborn recession and it’s maybe two, maybe three years, but ultimately, you want to use that to your advantage,” Newman said.

Even with the continuing slide in sectors like software, Newman said buying at current levels is a reasonable move.

“There are a lot of areas that are [looking] good. About a month ago, we were talking about software, and buying at those levels a month ago were true positions,” he said. “It doesn’t mean they’re going to go up right away, but they’re already in buy territory.”

In the Canadian picture, Newman said he likes Energy stocks, which he believes are still trading “extraordinarily cheap,” as well as Materials and the Canadian banks. 

But he also singled out software, saying, “I’d be looking at the areas of distress that have really fallen out of bed like the software area, not thinking that you’re going to win in the next week or two but that you’re going to win in the next two or three years.”

Software stocks beyond Canada’s borders have had it rough, as well, of course. The North American Tech-Software Ishares ETF, for example, is down about 39 per cent since mid-November. 

For his clients, Newman said he’s done a lot of profit-taking as a result of the run-up in share prices over the past while where stocks got to “levels that we didn’t think they get to.” 

As a result, he’s sitting on a lot of cash and ready to deploy it, a position that he thinks a lot of people are in right now. Newman thinks that if there’s a so-called soft landing where the US economy is able to hit bottom without tipping into a recession, there’s likely to be a big upswing to the market.

“It will go up massively. There’s so much cash on the sidelines. If we could really see that this is contained, that inflation is under control and that all the positive arguments of people’s balance sheets and building spend and the reopening — if we could see that then we’re going to see evidence of a 1994 soft landing,” he said. “There’s definitely a path here.”