Why NAFTA tear-up is a real threat for investors

Economic experts analyse the unpredictability of the US-Canada NAFTA stand-off

Why NAFTA tear-up is a real threat for investors

The prospect of a NAFTA break-up is casting an increasing shadow over the investment landscape.

The Bank of Canada, despite raising interest rates another quarter-point yesterday, were dovish about whether the economy could remain at capacity, citing, in part, the uncertainty surrounding the future of the continental trade pact.

US President Donald Trump has repeatedly threatened to pull out, while recent reports that the Canadian Government expects him to terminate the agreement caused the loonie and jittery markets to fall.

Investors in companies in certain industries – auto, diary, eggs, softwood, steel and aluminium, for example - can be forgiven a level of anxiety right now.

Eric Lascelles, chief economist for RBC Global Asset Management, says they should take uncertainty over NAFTA’s future seriously, with a caveat that it still remains odds-on to stay intact.

He said: “The threat of a NAFTA tear-up is genuine and as such warrants consideration as a very real scenario for investors. We peg the risk [of it happening] at around 35%, but highlight the even larger risk that market concerns temporarily arise if an exit is tentatively triggered by the White House (though conceivably not followed through on when the six-month cooling-off period lapses).

“This protectionist threat is one of several risks that argue for less investment ebullience than the recent clip of economic and earnings growth would otherwise suggest. It should not be anyone’s base-case scenario, however.

“Fortunately, the stock market on the aggregate stands to be less adversely affected than one might initially imagine. We figure the failure of NAFTA should subtract about 0.4ppt. From economic growth, a notable smaller effect than the positive boost from tax cuts.”

Lascelles believes the markets may be slightly underestimating the “protectionist risk”, although concedes it is difficult to quantify the precise amount.

He said: “Despite this, there is a 65%-plus chance that NAFTA remains intact and thus markets will rise and not fall at the conclusion of NAFTA expectations. The uncertainty in the meantime may be undermining capital expenditure projects in North America.”

Derek Massey, CFA, head of portfolio management, private investment management at HSBC Global Asset Management (Canada), in discussing potential shocks to the economy in his January outlook, said a disintegration of NAFTA would obviously be detrimental to Canada but that you have to put in perspective Trump’s tactical rhetoric.

He said: “Like I’ve been saying, the headline stories of the Trump negotiation process, which I’d describe as ‘rip it all up and start again’, is nothing more than a negotiating tactic as far I’m concerned.

“It’s the playbook of how he negotiates so until we actually get some concrete ideas on what NAFTA is going to look like, I think the status quo is maintained.”

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