Statistics Canada’s (StatsCan) Labour Force Survey released last week for the month of April revealed that the Canadian economy shed another 2 million jobs and the unemployment rate rose by 5.2 percentage points to 13%, the largest monthly increase on record. The cumulative impact of Covid-19-related shutdowns – when including Canadians who are either unemployed or working significantly fewer hours – is 5.5 million or 22% of the working-age population. Encouragingly, almost all (97%) of the newly unemployed in April expect to return to their jobs once the shutdowns end.
While the outbreak has undoubtedly brought significant disruptions to Canadian businesses, the impact across sectors and industries has been uneven. For jobs where working from home is the norm and close physical contact is not required to carry out one’s responsibilities, employment losses were much less severe, according to StatsCan. For instance, in industries such as public administration, finance, as well as professional, technical, and scientific technology, total hours worked fell between 5-15% since the pandemic started in February. On the flip side, the number of hours worked in the food and accommodation industry fell a massive 60% since February.
The ability to adapt to workplace disruptions and potential to benefit from changing consumer/business behaviour has made tech companies standout performers throughout the pandemic. Last week, the tech-heavy Nasdaq Index once again turned positive for the year. Similarly, Canadian tech returns have been nothing short of impressive, with the S&P/TSX Information Technology Index up 36% on a year-to-date basis, grossly outperforming any other sector (see chart below). The prospect of an accelerated digital transformation and more rapid shift towards online shopping is showing up in asset prices and earnings projections. Since the start of the year, long-term (3-5 year) earnings growth estimates have actually risen for Canadian tech stocks while falling for every other sector (see chart below).
Importantly, the information technology sector has risen to account for nearly 9% of the Canadian equity market, up from a mere 2.4% five years ago, and is now almost as large as industrials. This is, of course, related to one specific strong outperformer. Last week, Shopify briefly dethroned RBC to become the largest publicly traded Canadian company, making up 5.5% of the total S&P/TSX Composite Index (TSX) market cap and over 60% of the tech sector. At the same time, natural resources have dwindled in share due to the persistent underperformance of energy and industrial commodities. Financials have held relatively firm, remaining the largest sector and a consistent staple of the Canadian stock market (see chart below).
Although the domestic equity market composition has notably evolved to become less resource intensive and more tech friendly, the universe of secular-growth themes is still nascent in Canada. Compared to the broader developed world, the Canadian equity market remains relatively concentred from both a sector (nearly 60% of the TSX is energy, materials and financials) and single-security (as already mentioned, recent tech-sector gains have been principally driven by a single company) perspective (see chart below). While many Canadian cities stand out as emerging centers for tech talent, this has not translated into the growth of domestic large-cap public companies. Lastly, exposure to healthcare companies is virtually nonexistent within the TSX, since the handful of businesses that make Canada’s small healthcare sector are focused on cannabis.
From a tactical perspective, we emphasize building resilience in portfolios at a time of high economic uncertainty and financial market volatility. Investors can achieve greater resilience by holding benchmark allocations in government bonds, a preference for the seniority of corporate credit in the capital structure over stocks, higher quality companies within equities, and securities with best-in-class sustainability ratings. We recently upgraded our view on U.S. stocks, in part due to the heavy exposure to quality and secular-growth companies within the technology, communication services, consumer discretionary and healthcare sectors.
Kurt Reiman is a Managing Director and BlackRock’s Chief Investment Strategist for Canada. Kurt is a regular contributor to The Blog in Canada.
Daniel Donato is an Associate within BlackRock’s Toronto office.