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A Shot In The Arm For The Mexican Economy

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The U.S., Canada, and Mexico have agreed to end all tariffs related to aluminum and steel opening a path to ratifying the USMCA.

The U.S., Canada, and Mexico just announced an end to aluminum and steel tariffs. The tariffs, put in place over a year ago, were among the first shots fired in President Trump’s trade war and the first to bear fruit. The three nations were able to successfully renegotiate the NAFTA deal and now that deal is closer than ever to ratification. Critics on all three sides of the issue have said, the deal can’t get ratified with the tariffs in place.

The U.S. and Canada, in a joint statement, said they had reached an agreement last Friday. The agreement includes dropping all WTO litigation, protections for metals companies, preventative measures for trans-shipments, and an agreed-upon system for monitoring and enforcing the new systems. Mexico released its own statement shortly after saying it too would end all tariffs related to the metals.

Democrats in Washington have been blocking the new deal from coming to a vote. They want stronger labor laws and other protections for U.S. workers the Trump administration wants to address at a later time. For its part, Mexico has just passed new labor laws intended to alleviate much of the Democrats concerns. The new laws, which have already gone into effect, center around workers right to unionize and a reform of the labor justice system.

Canada says it will move quickly to ratify the USMCA now that the tariffs are gone. Mexico is expected to do the same but the process may be slower if U.S. Democrats continue to stonewall. U.S. Congressman Ben Sasse R-Neb says the removal of tariffs is good for Nebraska, good for the U.S. and the last major hurdle to ratifying the USMCA is gone. Chuck Schumer, D-NY, says we should be focusing on China and that there are more issues than just this one Democrats want to be fixed.

China, Left Out In The Cold

The takeaways here is that China is getting left out in the cold. While it is facing tougher times with U.S. trade relations on the decline nations like Mexico and Canada are poised to benefit. Mexico, for one, has been working diligently for the last decade to improve its manufacturing sector. Mexico is still small when compared to China as an export nation but it is growing. The new USMCA, renewed and reinvigorated trade with the U.S., and protections for its all-important workforce will help boost that growth over the long-term.

China for its part is doubling down on protectionist rhetoric. President Xi Jinping says China is ready to embark on a ‘new long march‘ signaling an unwillingness or lack of desire to deal on trade. That stance (and the trade war, tariffs, outlook) is prompting U.S. business to look elsewhere for its needs. Those needs are being met by the burgeoning manufacturing economies of the emerging markets like Vietnam, India, Bangladesh, and Mexico.

The Mexican IPC Index hit a 6-month high a few week’s ago and is now in retreat. The move has been exacerbated by a round of weak earnings from Mexico’s top companies. Earnings for the first quarter came in 26% below estimates as the global slowing and President Obrador’s austerity measures hit revenues. Looking forward, GDP is expected to fall to 1.7% in 2019 but this year is also expected to be the bottom of the slowdown for Mexico. GDP and corporate profits are expected to rebound beginning before the end of the year. This new development of tariffs may be the signal that rebound has started.

Mexico’s top stocks are all down over the last month but the losses look overblown. In most cases, the lows are sitting on key support levels and/or accompanied by weak technicals and indications of over-extension. Recent price action coupled with Friday’s announcement suggests a bottom could be in place or forming and that is seen in the valuation of Mexico-focused closed-end fund The Mexico Fund (MXF).

Closed-end funds tend to trade at a discount to their net asset values. When their net asset values are shrinking, when the stock market is shrinking, their discounts tend to widen. When the market expects that shrinkage to end or reverse the discount to NAV tends to shrink and that’s what we have with the MXF. The discount to NAV has shrunk from a long-term low as investors scoop up the discounted portfolio of stocks in anticipation of higher prices.

The Mexico Fund is a Mexico-centric fund with 100% of assets invested in Mexico and nearly all in Mexican equities. The fund tends to stick with the higher cap stocks and more established businesses in the fastest growing sectors. At last report the portfolio was little-changed. There is a heavy focus on the Mexican consumer, Mexican financials, and Mexican infrastructure; three pillars of a rapidly growing economy.