Watch Trump's Mood With Mexico Tariffs Hanging Over Goods From Autos to Denim

(Bloomberg) -- As we go into the weekend with the specter of a trade war with Mexico looming large, the main theme is uncertainty.

Among U.S. equities, the automotive sector is the most at risk in the absence of a clear resolution to trade negotiations with Mexico. Retail, transportation, materials and industrial companies are also vulnerable.

The U.S. and Mexico are expected to resume talks in Washington on Friday in order to reach a deal, at the same time as the Trump administration moves forward with plans to impose a 5% tariff on Mexican imports starting Monday. But Vice President Mike Pence’s chief of staff, Marc Short, said the president could change course if the talks go well.

“With each passing hour it appears less likely that there will be a deal in hand by Monday,” Wells Fargo senior economist Tim Quinlan wrote in a note on Thursday, noting that the tariffs could be short-lived and politically untenable given the “economic pain they will cause.”

Mostly however, experts are wary of predicting any outcome, although most agree implementing such tariffs is going to be hard and complex. According to Cowen’s policy analyst Chris Krueger -- whose base case assumption is that the tariffs will go into effect -- the situation is “very fluid and entirely dependent on Trump’s mood on Sunday.”

A Bloomberg survey of 27 economists conducted May 31 to June 3 suggests there is no consensus in the market about how far Trump will go with tariffs on Mexico, and also shows strong disagreement about how negative the effect will be, Deutsche Bank chief economist Torsten Sløk wrote in a note.

And once effected, enforcing the tariffs may be a “nightmare,” Krueger wrote in a note. “We are detecting more anxiety and confusion about the mechanics surrounding tariff implementation (should they go live),” he said, as tariffs between the two countries have been “nearly eliminated in the 25 years since NAFTA,” and about $1 billion worth of goods flow north across the border every day.

Here are the stocks and sectors to watch ahead of the decision.

Automotive

While General Motors and Ford both have significant exposure to Mexico, GM has been identified as having the bigger risk. Among auto suppliers, American Axle, Autoliv, Aptiv, Lear, Magna International and Visteon are companies to watch. Car dealerships Group 1, Lithia Motors, Penske Automotive, Asbury and AutoNation will also be affected as cost increases due to the tariffs are ultimately passed on to car buyers.

Auto insurers

Auto insurers may see claims costs rise about 8% by year-end from tariffs on Mexico and China, according to Bloomberg Intelligence analyst Matthew Palazola. “A tougher pricing environment will make it difficult for auto insurers to pass higher component costs on to customers,” the analyst wrote in a note, adding that such a market would favor Progressive and others that excel at pricing and claims management.

Retail

Denim could be a big loser in a trade war with Mexico, given that the nation is the largest supplier of men’s and boy’s jeans to the U.S., accounting for more than a third of imports, according to the American Apparel & Footwear Association. Investors may want to pay close attention to Kontoor Brands, Levi Strauss, American Eagle Outfitters, Abercrombie & Fitch, The Gap Co. and Zumiez.

Constellation Brands produces the “vast majority” of its beer brands in Mexico, according to Ken Shea, an analyst at Bloomberg Intelligence.

Restaurants are also at risk from a trade war with Mexico. Chipotle estimates the Mexico tariffs, if enacted, could cost it $15 million this year.

Industrial

Navistar, most of whose Class 8 trucks are made in Mexico, is a manufacturer to watch, especially as it battles softening demand for new trucks, RBC Capital Markets analysts wrote in a note. Multi-industrial stocks such as Ingersoll-Rand, United Technologies, Johnson Controls, WW Grainger, Wesco and HD Supply have been offsetting increased levies with price and productivity and escalating trade wars are the biggest concern to demand at this point in the economic cycle, RBC said.

Transportation

The 5% tariff level suggested by June 10 may not derail freight demand, but a potential ratchet up to 25% by Oct. 1 adds an overhang for companies with Mexican exposure, such as Kansas City Southern, Union Pacific and Werner Enterprises, Bloomberg Intelligence analyst Lee Klaskow wrote in a note on May 31.

Energy

Companies that refine in the Gulf of Mexico and buy crude from Mexico will be affected, RBC said, flagging Shell, Exxon and Chevron. “Mexico is an increasingly important source of heavy crude barrels as refiners have already been scrambling to replace Venezuelan, Iranian and other OPEC barrels,” RBC added, saying stocks like Marathon Petroleum, PBF Energy, Phillips 66 and Valero Energy are most at risk.

Materials

For building product companies like Whirlpool, Fortune Brands and Mohawk, rising tariffs could hurt consumer confidence and demand for big ticket items. For chemical stocks such as LyondellBasell and Huntsman, a potential retaliatory tariff from Mexico is a big risk to watch for, while coatings companies including Axalta and PPG could get hurt if autos suffer because of the tariffs.

--With assistance from Janet Freund and Elena Popina.

To contact the reporters on this story: Esha Dey in New York at edey@bloomberg.net;Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Morwenna Coniam, Scott Schnipper

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