By James Langton

(July 21 – 16:40 ET) – Merrill Lynch Canada analysts say technology continues to dominate the Canadian market, but contrary to popular opinion it isn’t entirely dependent on Nortel Networks Ltd.

Tech investment is expected to jump 25% this year, and tech exports are pushing a strong trade surplus, says Merrill. Tech business has grown three times as fast as the rest of the economy over the past year, but tech stocks are outpacing the rest of the market by a factor of four. “This gap suggests that the good news is priced in though this doesn’t mean the fundamentals can1t improve further.”

Merrill says its bottom-up, three-stage dividend discount model for the TSE 300 shows that its fair value “is just north of 11,000,” implying that the market is currently undervalued by 4%. Merrill says it would only worry about the TSE’s valuation if it moved above 12,000.

Within the TSE, Merrill sees great value in the pipeline sector. While the market’s day-to-day gyrations seem to be dominated by Nortel, Merrill says the rest of the market is up 12% this year without Nortel. It points to blue chips such as Thomson, Bombardier, Seagram, the oil patch and financials.