On Aug 27, the United States and Mexico agreed on a new bilateral trade deal which will likely rewrite North American Free Trade Agreement or NAFTA. President Donald Trump said the deal would now be named The United States-Mexico Trade agreement, per an article published on CNBC.
Trump indicated in his campaign that he wants to renegotiate the North American Free Trade Agreement - or totally remove it. The agreement had tied up the United States, Canada and Mexico for more than two decades. The deal permitted manufacturers and farmers to do business smoothly. Now it remains to be seen if Canada agrees to the new deal.
There was a time when Mexico was viewed as a Trump-unfriendly investment due to his plans of building a wall along the border as part of his immigration strategy and making an unwilling Mexico pay for it.
Apart from the wall issue, Trump's intention to put restriction on outsourcing made Mexico investing more exposed to risks. Several auto companies have manufacturing hubs in that country. Mexico peso nosedived to an all-time low after Trump's victory in the U.S. presidential election in November 2016. Also, Trump got entangled in the import tariff war with the country this year.
Inside the New Deal
Per U.S. Trade Representative, the deal would not disengage the 25% tariffs on steel and aluminum that drove costs for auto companies. The new deal will continue for 16 years and will be reviewed every six years. It will also not put a cap on light vehicle imports from Mexico, per an article published on CNBC .
The deal's arrangement says that North American content in light vehicles will have to go up at least 75% from the present 62.5 % requirement. Plus, more domestic steel and aluminum are needed to be used in vehicles, automakers must manufacture more of the parts domestically and at least 40% to 45% of the car must be manufactured by workers earning at least $16 an hour to escape tariffs.
On Aug 27, the Mexican peso rose about 1% against the greenback on optimism over the treaty. Wall Street also received an added tempo in its upward journey. The S&P 500 and the Nasdaq composite hit a record high on the occasion. Dow Jones Industrial Average also closed above 26,000 for the first time since Feb 1.
Against this backdrop, we highlight a few investing areas that have rallied following the U.S.-Mexico trade deal.
First Trust NASDAQ Global Auto ETF CARZ - Up 2.7% on Aug 27
Auto stocks were in a tight spot following Trump's presidential victory. This was because Trump was expected to take stricter steps on immigration and outsourcing. Companies like Ford Motors F and General Motors GM outsource their car production to Mexico. So, with problems apparently solved with Mexico, auto ETF CARZ gained on Aug 27 (read: Is the Auto ETF Headed for a Trump Bump or Slump? ).
iShares MSCI Mexico Capped ETF EWW - Up 2.7% on Aug 27
Trump's win in the U.S. presidential election has been a pain for several foreign country investing. But it was Mexico that faced the maximum wrath. So, it is needless to say that the country ETF Mexico will benefit out of this treaty.
iPath Series B Bloomberg Livestock Subindex Total Return ETN COWB - Up 3.5% on Aug 27
The livestock industry came under pressure in the middle of 2018 as U.S. pig farmers were subjected to retaliatory pork tariffs from Mexico. Since Mexico is the largest buyer of U.S. pork based on volume, the tariff was deemed as a major setback to American meat producers. However, COWB, which reflects the returns that are potentially available through an unleveraged investment in the futures contracts on livestock commodities, jumped U.S.-Mexico trade deal 2016 (read: Mexico Pork Tariff Threats Put These ETFs & Stocks in Focus ).
iShares MSCI Canada ETF EWC - Up 1.1% on Aug 27
The revamped NAFTA and conciliatory trade accord between Mexico and the United States were viewed as an easing of trade tensions. As a result, Canada ETF gained on the day. Plus, a rally in pot stocks benefited Canada's stock market (read: Pot Stocks Are on a High: Play These Cannabis ETFs ).
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report General Motors Company (GM): Free Stock Analysis Report Ford Motor Company (F): Free Stock Analysis Report FT-NDQ GL AUTO (CARZ): ETF Research Reports ISHARS-CANADA (EWC): ETF Research Reports ISHARS-MEXICO (EWW): ETF Research Reports IPATHBB-LVSTK (COWB): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report