The real implications of a renegotiated NAFTA
The US has more to lose from President Trump’s initial tough North American Free Trade Agreement (NAFTA) stance than its neighbours, according to the investment manager of the King Irving Sura Pacific Alliance Fund, which may partly explain Trump’s subsequent softening on the issue and the opportunities it has left in its wake. Trump called NAFTA “the worst trade deal” ever made in the USA, but his changed stance recently in confirming that NAFTA would remain in place has seen negative market sentiment peak and level out as the threat of potential economic fallout dissipates. Speaking via video conference from Chile, Felipe Asenjo of SURA Asset Management, the investment manager of the King Irving Sura Pacific Alliance Fund said, “Trump’s initial hardline stance on reversing NAFTA created nervousness across markets about the potential economic fallout of lower economic growth and reduced foreign investment across Mexico and fellow Pacific Alliance nations.” Potential repercussions for the US were higher prices for US consumer goods including automotives, electronics, computers, TVs, beer, agricultural goods, clothes and more, leading to a potential rise in inflation. “In addition, the US Chamber of Commerce estimated a reversal of NAFTA could cost the US six million jobs that depend on trade with Mexico,” Mr Asenjo said. Trump’s softened stance is therefore no surprise. “NAFTA has been a political football for years and has survived four US elections unscathed. The deep commercial and infrastructure ties between the US and Mexico, in conjunction with the fact that Mexico is the USA’s third largest trading partner, accounting for 14.5% of total trade – just behind China and Canada who sit at 15.8% and 15% respectively – make it extremely unlikely that we will see a reversal on lower tariff policies.” Given Trump’s recent confirmation that NAFTA will stand, Mexico has bounced back. “Even if, by rare chance, the US does restrict trade and put in place embargo measures, Mexico’s labour competiveness would remain unparalleled. It’s unlikely that nations such as China would take up any trading slack, which would leave the Mexican economy relatively unscathed.” Mr Asenjo said while some market nervousness may still remain, now that the ‘Trump frenzy’ has petered out in equity markets, it’s an opportune time to identify selectively companies that represent valuable investment opportunities in the emerging markets of the Pacific Alliance – Mexico, Chile, Colombia and Peru. 2 “This includes those able to withstand lower growth or higher servicing debts and those whose focus is the growing domestic market,” he said. “Also, infrastructure-centric businesses such as base metal producers or cement companies with a strong US presence and those with a net-positive USD exposure could also present valuable investment opportunities.” With current valuation measures sitting at rock bottom for emerging markets, now is also an ideal time to unearth businesses which are undervalued due to recent market noise and sentiment.
