The ABCs of the USMCA

Oct 04, 2018 | Warren Andrukow


How should we interpret the signing of the recently announced United States-Mexico-Canada Agreement? Leveraging an article written by RBC’s Chief Economist, Eric Lascelles, titled, “The ABCs of USMCA”, we can get a better sense of the agreement’s winners and losers, the likelihood of the deal going through as announced, and what has changed from the original NAFTA agreement. Once you have read the linked article, we will provide our thoughts pertaining to how we think the agreement will impact your portfolio.

First though, a word about economic forecasts: Those who know us, understand that we are not normally consumers of economic forecasts. The purpose of sharing this particular article is that it does a nice job of summing up the terms of the USMCA, and explaining how it may impact Canada, under the assumption that it does, in fact, go through. We remain skeptical of anyone assigning precise “odds” to an economic outcome, but we also understand that an economist’s job is to make predictions about an unknowable future, and we respect that this particular one is willing to reveal his conviction level, for whatever it is worth.

This line of thinking leads nicely to assessing how the array of potential outcomes presented in the linked article might, or might not, impact an investment portfolio. Eric Lascelles lays out three scenarios, and the associated economic effect of each in his article. We could debate the probability of the scenarios, or the severity of the effect, in fact, a lot of speculative investors are likely (pointlessly) doing just that. The question remains, however, can we utilize any of the information contained in the article to drive a better investment outcome?

Academic evidence reveals that markets do a remarkably good job of “pricing in” new information instantaneously. This means that long before the announcement of the USMCA, the collective opinions of all market participants regarding the likelihood of USMCA ratification were already reflected in the values of the US, Canadian and Mexican stock markets. Understanding that, the logical conclusion is we have not gained any actionable intelligence as investors. In fact, academic research overwhelmingly concludes that we stand to lose more than we could potentially gain if we get drawn into making tactical adjustments to a portfolio each time we are presented with a, seemingly important, new bit of information.

The prudent course of action following almost any major news event is to stay disciplined to both your asset allocation and investment philosophy, regardless of how tempting it might be to assume you know something the market does not.


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