Friday, May 31st 2019

Trade Wars Intensify, This Time with Mexico


Markets tumbled after Trump threatened tariffs on Mexican imports. Constellation Brands (STZ) would be most impacted, though full tariffs are unlikely in our view.

Trade wars intensified this week after President Trump brought tariffs into his immigration fight against Mexico.

What Happened?##

  • Trump plans to impose a 5% tariff on all imported goods from Mexico starting June 10th, then "gradually increase" it until the flow of undocumented immigrants across the border into the U.S. stops.
  • Tariffs would be raised to 10% on July 1st, 15% on August 1st, and 25% on October 1st if the crisis persists. "They would remain at 25% until Mexico acted."

What Does Mexico Need to Do?##

  • Exactly what Mexico would have to do is actually unclear.
  • Trump is threatening these tariffs "until Mexico substantially stops the illegal flow of aliens coming through its territory."
  • Essentially he has dared Mexico to risk economic catastrophe on both sides of the border if it's not willing to meet his demands.

What's the Impact?##

  • Mexico is the U.S.'s largest trading partner. They sent the U.S. ~$350B of goods last year. 5% of that is ~$17B, and 25% is nearly ~$90B.
  • The main impact to the Titan composite is from Constellation Brands (STZ), the maker of imported Mexican beers like Corona and Modelo.
  • STZ is significantly exposed to these tariffs if they are in fact enacted. The stock fell -8% on Friday as investors scrambled to handicap the company's future profits for potential tariffs.

Our Take##

  • If enacted, these tariffs would definitely hurt many U.S. and Mexican companies' profits, including those of Constellation Brands.
  • It is far too early to jump to conclusions, in our view.
  • We saw these back-and-forth dynamics between U.S. and China in 2018: they derailed markets in Q4, only to see them rally back hard in early 2019.
  • We think U.S. trade dynamics are highly volatile right now. Rushing to "do" anything with respect to stocks as a result of Trump's trade war treats can be a mistake.

Generally, we believe long-term investors have been given an opportunity to buy many high-quality compounders at a discount on days like today.

We think it's highly unlikely these tariffs will be fully enacted as markets seem to be pricing in. The consequences would be far too economically devastating for the U.S. to follow through, in our view.

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