Investors optimistic on Nafta, ready for any outcome

The investment community watching Nafta renegotiations are genuinely upbeat ahead of the seventh round of talks starting this weekend in Mexico City, but regardless of the result, local corporates, backed by the resilient Mexican economy, look well prepared to drive new investment.

"I'm much more optimistic today than I have been at any point that Nafta will be successfully renegotiated," said Frank Kelly, the global coordinator for public and government affairs for Deutsche Bank, speaking at the LatinFinance 13^th Mexican Financial Summit, held in a media partnership with BNamericas.

"It certainly has been a fascinating year sitting in Washington watching international trade outlook overall and Nafta in particular," said Kelly. "There are breakthroughs taking place [on Nafta] ... things are beginning to move." adding that there was a breakthrough Wednesday on the contentious Investor-State Dispute Settlement (ISDS) issue.

"I think this is a positive overall for the region. I think it's very positive for Mexico, the outlook," noted Kelly.

That breakthrough may be related to news circulating at Insidetrade.com that Canada would be proposing to scrap its ISDS proposal altogether in an agreement with the US trade representative, removing a stumbling block that generated considerable noise at the start of the year.

Also speaking at the event, Toyota North America's VP for Mexico, Nobozu June Umemura, described a change in tone from this time last year when US President Donald Trump pled with Toyota, "Please, don't build plants in Mexico, please build in the US'... so last year, we were very concerned."

"This year our company's thinking is more positive with Nafta," said June Umemura, describing the firm's evolving outlook over three significant meetings held in Mexico and Washington over the past year, whereas last year the firm held a more static view of maintaining operations with an eye on "very protective" US, and this year is looking towards new investment.

June Umemura stressed the continued importance of the North American region for the global auto manufacturer, noting that Toyota is this year producing "close to 2mn vehicles in the Nafta region, investing in the US this year almost US$1.6bn, and also investing US$1.4bn in Mexico this year."

June Umemura stressed the interconnectedness of supply chains between the US and Mexico, saying it expects to export 2bn parts to the US from Mexico suppliers in 2019, but exporting "about the same number" back to Mexico from the US, noting that parts often cross the board "two or three or four times."

Kelly went on to note that a key advance with Nafta has been to sell the success of free trade to a public that was largely unaware of the scope of Nafta's successes.

"I sit next to a gentleman here who's a perfect example of this... a senior executive of a Japanese auto company in Mexico City talking about the auto market in the US of a company that is, for all intents and purposes, as American as any of the 'big three' [Ford, GM, Chevrolet]. My kids drive Toyotas. They're everywhere," he said.

"[June Umemura] mentioned having to go Washington, having to go back and educate people, members of Congress, policymakers, journalists, the president, 'We need this. This is jobs. This is success. This is what we need.' And I think that is all moving in the right direction," Kelly said.

RESILIENT MEXICO WEATHERING UNCERTAINTY

Central bank economist Daniel Chiquiar singled out investment, particularly from the private sector, as the one component within Mexican aggregate demand that unquestionably suffers from Nafta uncertainty, though noting public investment has also declined from separate government efforts to consolidate debt.

The analyst noted Mexico has shown significant resilience, however, to absorbing shocks in recent years, including the Nafta problem, pointing out the particular importance of the nation's free-floating exchange rate regime.

Chiquiar noted that even though their baseline solution sees a smooth resolution to the Nafta issue, changes to US-Mexico trade relations will inevitably change over time, but the FX regime would allow for any adjustments to Mexico's export capacity.

The central bank economist said Mexico needs to modernize its trade infrastructure regardless of what happens now with Nafta to be able expand trade from Mexico to the US and other markets, adding that with better, more adept infrastructure, the country's ability to absorb trade shocks would be even less costly.

CANCEL NOISE, PREPARE FOR WORST

Darin Batchman, a portfolio manager for emerging markets corporate debt at Stone Harbor, said his firm has worked to filter out the political noise coming across into markets over the last year with Nafta negotiations: "There's that initial reaction, which is always too far one way or the other."

"What we have tried to do is maintain our investment portfolios through all that noise," underlining that the firm's job is not to predict what will happen with Nafta, but to be prepared to help their clients through any number of scenarios.

Batchman also looked at the most exposed sector, Mexican manufacturers exporting to the US, saying, "The logistics have become so intertwined, and so dependent on each other, even if [Nafta] were to go away... these companies are still an integral part of these global supply chains."

"The other thing that we've seen too, is that, in general, the Mexican corporate sector has done a really, really good job in preparing themselves," said Batchman, pointing out that in terms of financing, the local corporates' capital structures are generally robust.

FROM THE BANKER'S PERSPECTIVE

Asked to describe the banking perspective with current events, and trade in particular, Kelly commented, "Political risk has been overwhelming globally." suggesting it reminded him of a kid in front of 20 televisions and not knowing how to make a clear assessment.

He added, however, that institutional investors have been learning very quickly how to do this and focusing on how to get to investment opportunities.

With regard to Mexico, he said some clarity is already emerging. With the election, it does not look like there could be a large majority in congress, making any major reversal on structural reforms all but impossible.

He cited as a positive that Nafta seems to be moving forward, as well as the advances in discussions between Mexico and the EU and the prospect of Asian investment into Mexico.

Looking at building concern about a more aggressive normalization of interest rates at the US Federal Reserve, Kelly discussed a key changing of the guard at the reserve bank, emphasizing that with recent placements "we have [at the Fed] a very global view" with monetary policy moving in a more coordinated fashion with the rest of the world.

"This is not an America-first federal reserve," said Kelly, a point with which Chiquiar agreed, who added he believes the Federal Reserve "will be much more sensitive to the consequences of their actions and [I] expect them to have a much clearer communication of their actions."