Janus Henderson: U.S. Mexico Trade War? Investors, Don’t Panic
Director of Research Carmel Wellso explains what the latest front in global trade wars means for investors.
Key Takeaways
- President Trump’s threat to impose tariffs on Mexican exports caused markets to sell off globally on Friday.
- A trade war between the U.S. and Mexico would likely be a material policy misstep and, therefore, is unlikely to garner support in Washington, D.C.
- However, investors should prepare for continued market volatility – especially among companies with significant exposure to Mexico, such as automakers – so long as tariffs remain a possibility.
The bull in the china shop is back at it. On Thursday, President Trump tweeted that he will impose a 5% tariff on all goods imported from Mexico until the flow of illegal immigrants into the U.S. ends. The tariffs are set to take effect June 10, and escalate by 5% every month up to a maximum of 25%.
As rattling as the news is, we do not believe broad support exists in Washington, D.C., for the president’s tariff threat. For one, the potential for a policy misstep is material. Mexico is one of the U.S.’s largest trading partners, with Mexico exporting $346.5 billion in goods across the border in 2018, according to the Office of the United States Trade Representative.1 A 5% tariff would amount to a tax increase of more than $17 billion for U.S. consumers and businesses. In addition, there is little evidence that Mexico has the resources to stem the tide of migrants crossing into the U.S., tariffs or not.
The tariffs could also have a deleterious impact on the broad economy, including weighing on consumer and business confidence, already under pressure as a result of the escalating U.S.-China trade spat. In addition, Mexico could retaliate and impose tariffs on U.S. exports ($265.0 billion in 2018). The combination would likely crimp U.S. economic growth, which previously was forecast to decline to 2.2% (adjusted for inflation) during the second quarter, down from 3.2% during the first three months of the year.2 A trade war with Mexico could bring those estimates down further.
What This Means for Investors
Markets reacted negatively to the news, with stocks and bond yields around the globe falling on Friday. In addition, market projections for a Federal Reserve rate cut by year-end jumped to 93%, up from 88% on Thursday.3
Such volatility is likely to continue so long as this new front in global trade wars remains open. In this environment, we’d expect U.S. companies that earn the majority of their revenues domestically to excel, especially those firms that benefit from lower interest rates (including real estate investment trusts (REITs) and companies that rely on debt to grow).
On the flipside, the auto industry could fare the worst. Roughly 20% of U.S. auto manufacturing occurs in Mexico and 15% of U.S. auto sales come from south of the border.4 Manufacturers will have to either take the tariffs out of profits or raise prices – a move that could result in demand destruction if prices jump by 25% in some four months.
Details Matter
The auto supply chain would also be negatively impacted, and today that chain includes technology firms such as semiconductors and makers of sensors and electronic connectors. The good news on that end: At most, autos make up only as much as 15% of revenues for these businesses, which should help limit the hit to profits.
Another potential positive: Tariffs typically result in the local currency weakening, and true to form the Mexican peso declined following Trump’s tweet. This weakening can help reduce the hit to U.S. consumers’ wallets and businesses’ bottom lines. However, for companies whose inputs are priced in other currencies (for example, oil refiners and consumer electronics firms that assemble PCs, servers, smartphones and TVs in Mexico) a weaker peso will not help offset the margin squeeze.
Finally, emerging markets as a whole could suffer. Exports to the U.S. make up almost 30% of Mexico’s gross domestic product (GDP).5Consequently, a 5% tariff could amount to as much as 1.5% of Mexico’s economy even before considering second-derivative impacts. As Mexico is an emerging market, the country’s slowdown, on top of uncertainty about China’s growth, could cause the broader asset class to decline.
In short, tariffs on Mexico could create an unwelcome domino effect in the global economy – one that we believe most members of Washington would want to avoid (including President Trump, up for reelection in 2020). Still, we’d caution investors to stay alert to trade developments and be ready for potential bumps ahead.
Source: https://blog.janushenderson.com/u-s-mexico-trade-war-investors-dont-panic/
Categories
Recent Posts
- Federated Hermes: Too Hot To Handle
- Visual Capitalist: Where Does One U.S. Tax Dollar Go?
- John Hancock: Weekly Market Recap Week Ended April 12
- John Hancock: Managing Interest-Rate Risk In 2024 And Beyond
- LPL: The Story Hasn’t Changed For The Fed
Archives
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- February 2023
- January 2023
- December 2022
- November 2022
- October 2022
- September 2022
- August 2022
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- February 2022
- January 2022
- December 2021
- November 2021
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- August 2017
- May 2017