Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Macquarie economist David Doyle provided a new forecast for Canadian home prices in the wake of new measures to limit immigration,
“The shift in federal immigration policy for non-permanent residents announced this week suggests a considerable moderation in population growth ahead - we estimate to 400K per year from 1 million per year in 2022 and 2023. While this should moderate demand growth, the record figures for 2022/23 have already resulted in a structural shortfall in housing … Despite this, challenges and risks remain. In particular the renewals of mortgages in 2025 and 2026. This may weigh on house price growth ahead as this could result in additional resale inventory. Our updated baseline house price outlook is for stable to mild price growth ahead (+1 to 5% in 2024) with affordability remaining stretched and in a new regime … Our baseline is for the BoC to cut by just 50 bps in 2024 and a further 125 bps in 2025. This would push the Overnight rate to 3.25%. As fixed mortgage rates already reflect the lion’s share of these anticipated cuts, affordability is likely to remain stretched”
***
The same changes to the temporary residency program might limit upside in currently outperforming apartment REITs according to Scotiabank research,
“Mr. Pierre Poilievre’s commentary on tying international immigration to housing starts has been piquing our interest (others seem to have noticed too). So our primary intent is to quantify potential demand implications should a policy along those lines come to fruition (we est. ~4% impact). Bottom-line, recent focus has been on accelerating supply growth to address affordability, perhaps understating downside risk to the “D” part of the equation in 2025. Apartment REITs outperformed 2023 and YTD on strong (and accelerating) SSNOI/FFOPU [same store net operating income/funds from operations per unit] growth … Our key estimates and ratings are intact but our TPs [target prices] fall 2%-3% (0.5x lower multiple for each) but medium-term risks seem biased higher post “return-to-school”, in our view. We don’t think 2024 estimates are at risk … That said, we see risks = market rents falling, policy risk (i.e., what we’re writing about; we await the Federal Budget in April), FFOPU growth deceleration in 2025″
The analysts rate Canadian Apartment Properties REIT and InterRent REIT “sector outperform.”
***
JP Morgan strategist Mislav Matejka sees reasons for concern regarding global equity valuations,
“The bulk of the equity performance so far this year, and indeed in the past 18 months, was driven by multiple expansion. Globally, 12m forward earnings are up only 7% from the lows, in contrast to nearly 30% P/E upmove … Current US forward P/E multiple of 21.4x is up 6% year-to-date, up 20% since Oct ‘23 and 30% from Oct ‘22 lows … Global earnings yield vs bond yield differential has been moving lower, to be now below 2007 level … Central banks are set to deliver some cuts in 2H, but in order to justify current equity valuations, we believe that we will need to see at least some earnings acceleration, as well … The P/E expansion that took place is reflective of a view by investors that activity momentum is in the process of bottoming out, and that earnings growth is set to accelerate this year, and beyond … Our concern is that profit growth could underwhelm, for a number of reasons … If the earnings acceleration fails to materialize, this could act as a constraint, in particular for Cyclical sectors, which are currently trading at price and P/E relative highs vs Defensives,”
***
Diversion: “More than half of chickenpox diagnoses are wrong, study finds” - Ars Technica
Scott Barlow