Auto Stocks Stumble in the First Trading Week After USMCA

Auto parts makers initially responded well to the news that the United States and Canada had reached an agreement that would maintain a trilateral deal on the North American continent.

Linamar Corporation (TSX:LNR) stock shot up 10% in early morning trading on October 1 as did Magna International Inc. (TSX:MG)(NYSE:MGA). As part of the deal, the United States included an "accommodation" for Canada and Mexico that would exempt them from any future auto tariffs.

However, this positive momentum did not last through the week.

Linamar stock was down 2.3% week-over-week as of mid-afternoon trading on October 5. Shares of Magna were down 3.1% over the same period. In order to make the deal work, Canada and Mexico were forced to accept several concessions that will add restrictions to the North American auto industry.

For example, 75% of a vehicle’s parts will have to originate from North America which is up from the 62.5% required under the North American Free Trade Agreement. The deal also includes new labour rules which will require 40% of content to come from plants paying workers at least $16 per hour.

The union bureaucracy in Canada and the U.S. threw its support behind this policy and claimed that this would be a boost for auto workers in both countries.

There are concerns that this new deal will curb the growth potential of the industry going forward. Even so, Magna and Linamar look like attractive targets considering recent quarterly earnings.

Investors may want to consider buying the dip for a short-term run into the final months of 2018.