MATCO MONTHLY CHART DECK – SPECIAL LETTER EDITION THE LINGERING TRADE CLOUD APPEARS TO BE LIFTING: NAFTA – USMCA RESOLUTION
If there is one thing for certain, Canada’s investment landscape has been suffering from the uncertain trade outlook in North America. Since Donald Trump was elected in November of 2016, certain countries have been in his cross-hairs with respect to trade. The main objective for the U.S. was to address its current account deficit (importing more goods than exporting). Ironically, Canada’s trade with the U.S. was an immaterial contributor to its current account issue, but let’s move past that for the time being. There remains some work to be done in finalizing the deal, in the meantime we would like to examine the economic and investment implications of the newly minted United States, Mexico and Canada Agreement.
The direct economic impacts will relate to interest rates and the Canadian dollar. The NAFTA trade negotiations have been a cloud lingering over interest rates here in Canada, influencing them to the downside. Bank of Canada governor Stephen Poloz has been juggling domestic economic strength and trade uncertainty, which have been opposing forces through the majority of 2018. With the trade uncertainty dissipating, we now anticipate one additional rate hike here in Canada, which will allow the rest of the Canadian yield curve (interest rates) to drift higher. The Canadian dollar is also likely to respond by appreciating toward $0.80 CAD/USD, and possibly settling just north of that mark by year end.
The auto sector is likely to breath a sigh of relief. We anticipate companies directly impacted will experience a modest positive re-valuation as the negative impact of heavy tariffs has subsided. Canada has avoided what seems to have been Donald Trump’s proverbial weapon of choice: tariffs on autos vis-à-vis section 232. Section 232 – national security tariffs – would have imposed a 20 to 25 percent tariff on cars and auto parts imported to the U.S. Trump has agreed that no hard limit would be placed on Canadian auto exports to the U.S. so long as exports don’t exceed a pre-determined level. This level is well above what Canada currently exports state-side, so this should be a non-event. A side letter to the agreement indicates that Trump preserved the ability to enact section 232, although the auto sector appears to be, for all intent and purposes, free and clear for the time being
The implications for the energy sector in Canada will be limited, and more directly impact Mexico. The deal states that Mexico will have direct, inalienable and imprescriptible ownership of all hydrocarbons in its soil. However, the energy chapter does not prevent foreign oil companies from producing oil in Mexico.
Canada’s most significant concession within the agreement was to grant U.S. dairy farmers access to roughly 3.5% of its approximately $16 billion (annual) domestic dairy market. Canada has also agreed to eliminate its Class 6 and Class 7 milk categories and associated pricing schedules for skim milk and other related dairy components.
The deal reached will also preserve Chapter 19 of the agreement. This section of NAFTA allowed companies to request arbitration if they felt their products had been unfairly impacted by anti-dumping or countervailing duties. This was viewed as a high priority item as it provides companies with the ability to protect themselves
The net investment and economic impacts for Canada are certainly tilted to the upside. Although details of the agreement will continue to filter into the public forum, we view this as having positive implications for our investment outlook for the remainder of 2018. We remain committed to our disciplined investment process. If you have any questions we would encourage you to contact your Matco representative.