Yahoo Finance Population growth slowdown will have minimal impact on stocks: Report
Canada’s population growth is expected to stall in the coming years as immigration moderates, but a TD Cowen report says the slowdown will only be 'marginally impactful' across different industries.
Canada’s population growth has surged post-pandemic, fuelled by record high levels of immigration, particularly with non-permanent residents. Non-permanent residents made up over half of Canada’s population growth each year coming out of the pandemic, more than any year in the past decade. National Bank chief economist Stéfane Marion wrote in a research note last week that the population count in 2024 is already where Statistics Canada thought it would be in 2028, based on predictions from 2022.
The population surge has contributed to a housing affordability crisis, and prompted Prime Minister Justin Trudeau’s government to introduce caps on the number of temporary residents allowed into the country. National Bank expects there will be a “population hangover” over the next three years, when demographic growth in Canada will slow significantly.
While the population surge has weighed on housing affordability, many companies have touted the increase as beneficial to their business. So what will the slowdown mean for the companies that have been benefiting from Canada’s surging population growth? Not much, according to TD Cowen.
“We do not view the potential slowdown in population growth as overly material for the telecom, real estate, diversified financials, consumer discretionary and consumer products and services sectors,” the TD Cowen report analyzing the implications of different population growth scenarios said.
“While growth for companies in these industries may be impacted at the margins, our analysis demonstrates that we do not believe that any impacts will be overly material.”
In the report, TD Cowen analysts conducted a “sensitivity analysis” on different industries to determine what impact the immigration policy changes and Canadian population levels will have on a range of industries. Its base-case scenario is based on TD Economics’ estimates on Canadian population growth, which assumes population growth of 1.75 per cent in 2024, 0.91 per cent in 2025, 0.9 per cent in 2026 and 1.08 per cent in 2027. The upside scenario is 50 basis points higher in each case, while the downside scenario is 50 basis points lower.
Most industries will not see major impacts, even in the downside scenario, the analysis found.
Risk for telecommunications 'blown out of proportion'
Telecommunications companies in Canada in particular have benefited from strong immigration, helping drive higher wireless subscriber growth rates. Executives from Rogers Communications (RCI-B.TO) and BCE (BCE.TO) have previously talked about Canada’s “strong immigration efforts” and “getting the share we deserve.”
But TD Cowen analysts say that future sales and earnings growth will be modestly impacted by varying levels of population growth. For example, TD Cowen estimates that earnings before interest, taxes, depreciation, and amortization (EBITDA) growth for Rogers in the 2026 fiscal year is projected to be 3.4 per cent in a base-case scenario, versus 3.5 per cent in the upside scenario (with slower population slowdown) and 3.1 per cent in the downside scenario (with a more extreme slowdown.)
“In other words, population growth can decelerate materially from 2023 levels with no disruptive impact on the (albeit modest) financial growth being delivered by these telcos,” the report said, noting that population growth is only one of the factors that drives wireless subscriber growth.
“We would argue that the risk of slowing population growth has been blown out of proportion by some investors, especially when telco valuations and estimates do not embed expectations for high growth… Our base-case forecasts, and we believe consensus investor expectations, already reflect that population and subscriber growth were at unsustainably high levels in 2022/2023, so a bit of deceleration should not hurt these stocks.”
What a slowdown could mean for REITS
Population growth has been a tailwind when it comes to real estate, as supply has failed to keep up with demand. While governments have started to focus on improving housing affordability, the supply gap remains wide. TD Cowen says real estate “fundamentals are poised to remain strong through and beyond our forecast horizon even in the event of lower population growth.”
“We believe it will be tough to move the needle on affordability in the medium term, even with lower population growth. Given this conclusion, we believe residential REITs within our coverage should continue to benefit from strong apartment rental fundamentals going forward,” the TD Cowen report said. Canadian Apartment Properties REIT (CAR-UN.TO), Boardwalk REIT (BEI-UN.TO) and Minto Apartment REIT (MI-UN.TO) are TD Cowen’s top picks in the real estate space.
When it comes to the consumer discretionary sector, TD Cowen says Dollarama (DOL.TO) and Sleep Country (ZZZ.TO) are the companies that will most likely be impacted by population growth in the near term. The analysis found Dollarama’s earnings per share could increase between 2 and 2.5 per cent in the upside scenario compared to the base case, and decrease between 2 and 2.5 per cent in the downside scenario.
For Sleep Country, the upside scenario could see earnings per share rise 3.25 per cent from the base case, while the downside would result in a 3.25 per cent drop. The baseline scenario for both companies will see earnings per share increase compared to 2024.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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