What does new trade pact with US and Mexico mean for the TSX and loonie?
The Canadian market has room to breathe now a trade agreement has been secured – but a major boost to the TSX is unlikely.
That’s the view of Jason De Thomasis, financial planner at De Thomas Wealth Management, who said the index is not overly exposed to the new United States-Mexico-Canada Agreement (USMCA) outcomes and so investors should not be overly optimistic about a bump in stocks.
De Thomasis also warned that it would be wise to temper expectations around the loonie with major headwinds poised to put the brakes on the short-term boost generated by the NAFTA replacement deal.
He said: “If there is any major effect [on the TSX], it will be sector specific - autos, industrials and dairy - as we saw with some companies already such as Magna. The removal of the sunset clause will also provide some more stability to certain NAFTA sectors.
“The deal should cause a further short-term move in the loonie, as we already saw yesterday, with the dollar reaching the highest level in several months. Mid to long term, the loonie should not be appreciating much further as Canada still faces some negative headwinds and we are still struggling in terms of competitiveness.
“With the increase in the loonie, I think this further increases the likelihood that we will be raising rates. But with the steel and aluminum issues and traffic still unresolved and our competitiveness still struggling, I think [Governor Stephen] Poloz will still be careful at the rate at which he can speed up the hikes.”
The freshly minted USMCA agreement has been largely welcomed among investors, mainly because it ends the uncertainty caused by the negotiations, not to mention the unpredictable NAFTA-related tweets from US President Donald Trump.
Canada’s exemptions from auto tariffs is a positive, said De Thomasis, and while some dairy farmers may not thank him for saying so, he believes they can ultimately cope with the extra leeway given to the US.
He said: “The protection to the Canadian auto industry is a definite positive from the deal – with exports allowed to be 40% above current levels before any tariffs are imposed. It’s enough breathing room for Canada’s auto-makers.
“One of the concessions by Canada in the agreement is giving the US more access to our long-protected dairy market. However, this will be phased in over six years and the industry and individual producers should be able to adjust over that timeframe.
“And the compensation to be received by dairy farmers - details to be finalized over the next several months - will further aid the adjustment process. From the consumers’ perspective, Canadians may possibly benefit.”
For investors with significant equities in the US, Richmond Hill-based De Thomasis warned that, while there might be short-term boosts, common sense suggests the gap between the US and the rest of the world will not last for ever.
He said: “While a deal on the surface should boost US equities, which have already enjoyed a fantastic 2018, the new focus may now turn to the continuing trade dispute between the US and China, which has showed little signs of ending soon.
“Short term, the [new] NAFTA deal may provide an additional boost to equities, but I think the majority will agree that the US is pretty late in the cycle. While I don’t see US equities declining in the immediate short term, logic would indicate that the continual increase in US equities’ divergence versus the rest of the world will be ending sooner rather than later, with the relative performance of the S&P 500 versus the rest of the world at its highest level in 40 years.”
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