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If you trust Warren Buffett’s judgment, now might be the right moment to buy NAFTA

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Investors can be forgiven for believing the markets these days are extraordinarily unpredictable, and the path forward extraordinarily unclear. There is some justification with this: China is reducing after years of carrying the worldwide economy around the back of their incredible growth; monetary policy in the world’s largest economy is tightening after nearly ten years with rates near zero; the commodities “supercycle” is finished, most agree; and oil prices that only a few years ago made squeezing oil from tar economical are now in the basement.

Warren Buffett accuses U.S. presidential candidates of creating economy seem worse of computer is

The United States’ economy is in better shape than the presidential candidates make it seem, investor Warren Buffett said Saturday, despite the fact that businesses like his still face challenges.

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These are facts, however their conclusion isn’t foreseeable. The waters are muddy. We are confused.

In this morass of uncertainty, the thrust of Warren Buffett’s annual letter to Berkshire Hathaway shareholders might seem like either folly or wisdom. Because of the Oracle of Omaha’s history, let’s opt for the second, at least for the moment.

Buffett’s main point was that the nattering nabobs of negativism (including some presidential hopefuls) about the U.S. economy have everything wrong.  

The economy isn’t teetering into recession. America’s children will not be poorer than their parents. America could keep on innovating, and producing, and growing.

“For 240 years it’s been a dreadful mistake to bet against America, and now isn’t any time to start,” Buffett writes. “America’s golden goose of commerce and innovation will continue to put many larger eggs.”

For Buffett, this is probably as much an article of religion as it is a reading from the economic signs. But even when investors don’t share his optimism, Buffett’s message reaches least a reminder that fear can blind us to opportunity.

After all, what if he’s right? What if all of the uncertainty over the U.S. economy really isn’t justified?

Maybe the outlook isn’t so scary in the end. The poor fourth quarter of 2015 isn’t looking so bad in retrospect: a week ago, the official estimate for Q4 U.S. GDP growth was revised upwards to one per cent in the previous 0.7 per cent. Consumer spending in January was the best it’s been in months, while retail sales and home purchases were up. Even inflation ticked up, to 1.3 percent – which must be music towards the ears of Federal Reserve chairwoman Janet Yellen.

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    Canada still lagging behind U.S. growth, and also at this point, we’re nowhere close to catching upDoes the market get it wrong on Fed rate hikes?

    So let’s say Buffett is right and also the growth trajectory of the United States continues, even while the rest of the world appears to be heading to hell in a handcart.

    For investors, it might imply that now is the time to purchase NAFTA – that’s, increase exposure to the economies within the United states Free Trade Agreement.

    At the this could suggest buying American – stocks, that’s. The S&P 500 continues to be hit hard this year – harder compared to S&P/TSX composite, in fact – amid fears of U.S. slowdown. Investors will probably wait to ascertain if the positive economic news has traction before deciding those fears are unfounded. But when they are, expect a rebound.

    Closer by, it makes sense to think about (or reconsider) stocks in Canadian companies that sell goods or services into the Usa. In the end, the domestic economy may be in the doldrums, but our neighbour could carry some select companies through.

    Results from Bank of Montreal last week exemplified this dichotomy. Healthy earnings from the U.S. retail operations counterbalance the writedowns it took on its energy portfolio. Too, towards the extent that a robust recovery will support further tightening from the Fed, financials both in the U.S. as well as in Canada should benefit.

    A solid U.S. recovery also bodes well for other Canadian companies that take advantage of the low loonie and also have plentiful U.S. revenue – names like Magna International Inc., Winpak Ltd. and Linamar Corp., for instance. At this time, this really is type of an old trade, plus some of these stocks (like Winpak) are back near their 52-week highs. But the recovery could enjoy renewed legs.

    Finally, investors probably shouldn’t ignore Mexico. Like all emerging markets, it’s fallen severely out of favour with investors amid concerns over the strengthening greenback and China’s slowdown. But the fortunes of Mexico, like a NAFTA member, are inextricably associated with the ones from the U.S. As well, while Canada shed export manufacturing capacity throughout the commodities boom, Mexico has increased its share, and on a cost basis is very competitive despite China. As a recent report from Credit Suisse points out, the peso – down more than 25 % from the greenback since mid-2014 – has perhaps been punished too much amid the global emerging markets selloff. So gaining some exposure might have a currency benefit, too.

    Of course, venturing into NAFTA’s lone emerging market isn’t without risk. Investors have been burned betting around the peso before. There may also be technical difficulties: last week, the Bolsa Mexicana de Valores were built with a 90-minute outage, within the height of earnings season.

    Yet perhaps the biggest risk to Mexico’s resurgence might be U.S. politics. If certain of the candidates live up to their promises, the next administration could make NAFTA trade harder – through transport regulation, tariffs or perhaps fences. That is not a good news story for Canada, Mexico or (I would argue) for that U.S.

    Fear, in the end, might operate in politics, however it usually doesn’t do much for economies or investors. Just ask Warren Buffett.

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