These Assets Would Be Hit Hardest By the End of Nafta

Investors were put on notice once again Wednesday: U.S. President Donald Trump’s campaign claim that he would exit the North American Free Trade Agreement might not be an empty threat.

Canadian government officials said they see rising odds that the U.S. will seek to rip up the trade deal, a revelation that spurred moves across a swath of stocks, bonds, and currencies. The White House later said its policy hasn’t changed.

The news served as an opportunity for analysts to re-evaluate which companies stand to be hit the hardest should the trade pact be ripped up. Here are the assets to keep an eye on as investors seek to price in a rupture to the preferential trade relationship between the U.S., Canada and Mexico.

The iShares MSCI Canada exchange-traded fund, ticker EWC, dropped 1 percent on Wednesday. The iShares MSCI Mexico ETF, ticker EWW, suffered a decline of 2.2 percent.

Canadian auto-parts makers Magna International Inc. and Linamar Corp. slid 3.2 percent and 1.9 percent, respectively, in reaction to the headlines.

The same goes for U.S. parts maker Lear Corp., which plunged by the most in more than six months.

A breakdown in the trade arrangement between Canada, the U.S., and Mexico could also send these stocks off the rails, given the volume of cross-border traffic.

Analysts at Cowen judged autos and freight carriers to be two of the sectors most at risk as Nafta renegotiation talks dragged on.

Concern about the end of Nafta is also changing the calculus for the Jan. 17 Bank of Canada interest rate decision, with the nation’s two-year yield dropping by the most in 18 months on Wednesday. Dig deeper into derivatives, however, and there are still indications that traders don’t see this overhang serving as a major drag on the loonie relative to the greenback over the next week.

Meanwhile, Trump-loving farmers weren’t shy about showing the president their support for the free-trade deal with Mexico and the U.S. during a recent rally. The end of the pact could pose downside risk to agricultural-equipment makers AGCO Corp. as well as Deere & Co.

Shares of alcoholic-beverage maker and marketer Constellation Brands Inc. have stumbled out of the gate in 2018, with Wednesday’s flurry of headlines adding to the pain. The company is the owner and U.S. distributor for Mexican beer behemoth Grupo Modelo — which brews the Negra and Especial brands as well as Corona.

Morgan Stanley, however, thinks the market got this story all wrong.

“Our base case is that a withdrawal from Nafta would actually be a positive for STZ, as it would likely experience an indirect benefit from a potential weakening of the Mexican peso versus the U.S. dollar (given STZ’s beer cost structure is weighted towards the Mexican peso),” writes analyst Dara Mohsenian, reiterating a previous call from October. “The potential negative impact from higher beer taxes is unlikely to play out in our minds, as we believe the administration and Republicans are unlikely to support placing an unpopular regressive tax of consumers in place on beer.”
Source: Bloomberg