As Pacifica 200 predicted months ago, the U.S. Senate approved fast-track authority yesterday, moving ahead the 12-nation Trans-Pacific Partnership (TPP).
Countries as diverse as Australia, Chile, Malaysia, New Zealand, Japan, Singapore, Canada, America, Peru and Vietnam are negotiating an ambitious pact that will supercharge trade and investment in the Pacific Rim.
A Painful Process
This trade and investment agreement has been in negotiations for over five painful years and, as you might expect, what has been holding up the agreement is politics. President Obama was lukewarm about free trade pacts, afraid of offending his union base. And without control of the U.S. Senate, free trader Republicans were stymied.
The thaw began with the president's re-election and the takeover of the U.S. Senate by the Republicans. President Obama, eager to put something in the win column, is willing to take the heat from Democrats and labor union bosses. The administration's "pivot to Asia" and heightened competition with China also make this Pacific trade deal a strategic priority.
On the other side of the aisle, Republicans could now move fast-track trade legislation through Congress. And all this progress has made leaders of our trading partners such as Japan more confident that any hits they take politically at home will not be for nothing.
For me, the turning came about a month ago when an influential contact in Washington, let's call him "Mr. Japan," told me that momentum for the pact had shifted suddenly and he expected a breakthrough this spring.
Why? Washington was finally moving and the Japanese were knocking heads to get powerful agricultural interests in line while other allies like Australia and Indonesia were horse trading instead of stalling.
Pacific 200’s private intelligence network had confirmed that both fast-track authority and an agreement were likely to be inked very soon despite some foot dragging by Senate Democrats, led by firebrand Senator Elizabeth Warren. A few weeks ago, chief negotiators met privately in New York for some serious horse trading, followed by a gathering of the 12 nations in Hawaii to finalize the deal.
Mind boggling in its complexity (the U.S. takes 80 specialists to each negotiation, Japan 120 and Australia 22) the ever-changing negotiating text is meant to be secret.
Now with fast-track trade authority becoming a reality, everything goes into overdrive. Prime Minister Abe of Japan is knocking heads, bringing powerful corporate and agricultural interests in line. The outlines of a grand deal are there, but the devil is in the details—and these details are a secret to everyone without access to the best private intelligence.
The Big Industry Winner Is ...
When this trade accord is signed, the surge in investment and trade will benefit many, but a few sectors and countries will garner the biggest harvest of profits.
And although the negotiations have been grinding on for five years, the last hectic negotiating stage is by far the most important. The stakes are high because the 11 countries in this pact have strong economic ties with each other and America. They account for more than 65 percent of U.S. trade and $175 billion of service exports and $700 billion of good exports.
By 2020, these countries will have a staggering 960 million of middle class consumers compared to 77 million American baby boomers.
The issues covered in this historic trade deal are deep and broad. For example, sensitive agricultural markets will be opened in Japan, Canada and New Zealand. Financial services reform means foreign investors will have more opportunities to invest in fast-growing banks and consumer finance companies. Stronger intellectual property protection also means higher profits for pharmaceutical companies and the movie and music industries.
Lobbyists, CEOs, politicians, economic ministers and industry mavens are now descending on Washington, Tokyo, Sydney and other capitals to plead for their special interests. The pressure is on because just a paragraph, a sentence or even a word in the final documents can mean millions or billions of sales and profits gained—or lost.
What industry will benefit the most from this pact? We believe the answer for investors is the food industry, but it's not the beef or dairy industry as many expect. The reason is that the dairy winners are all unlisted cooperatives in Australia. On the beef side, the decreases in import tariffs in countries like Japan are being brought in over a very long period of time—around 15 years—so the impact will be very muted.
The better play is probably processed foods and chicken and pork rather than beef since they are both more popular and less expensive. There is another reason why I consider this area the sweet spot of the trade deal. Many studies show, as disposable incomes rise, the first thing families spend more on is protein, with chicken and pork at the bulls eye.
Vietnam A Big Winner
While Japan and America will get a boost of economic growth as this agreement takes effect, the big winner will be Vietnam. The Tran-Pacific trade deal winding its way through Congress is estimated by a UBS report to potentially boost Vietnam’s economy by 14 percent over the next five years.
This country of 93 million is bursting with youthful energy, with 50 percent of its tech savvy citizens under the age of 30. Its manufacturing wages are half that of China, which is why foreign investment is steady and Samsung makes half of its cell phones here. Right now only 1.7 percent of Vietnamese own a car, while in Thailand the figure is 40 percent.
All this highlights why Vietnam’s exports have tripled in U.S. dollar terms since 2007 and its exports to North American markets are up an amazing 30-fold since 2000.
Meanwhile, the country’s macro situation has markedly improved. Inflation, just a few years ago running at 20 percent, is down to 2 percent. Interest rates have fallen from 15 percent to 6 percent, property markets have stabilized and credit growth is up.
Despite this progress, Vietnam’s stock market is still off 51 percent from its high and trading at just twelve times earnings. The current market value of all publicly traded companies in Vietnam is 30 percent of GDP, while Thailand and the Philippines are trading at 95 percent and 115 percent, respectively.
These gaps will not last forever, so I encourage you to take action by blending Vietnam into your global portfolio. But you’ll need a fund manager on the ground in Vietnam, with the flexibility to invest in medium-sized companies instead of just the five largest companies that dominate the market.
For these reasons, I suggest that you take a good look at Asia Frontier Capital’s (AFC) Vietnam Fund.
This fund is up 40 percent since its launch in early 2014 and its current holdings trade at just a bit over book value and 7.4 times earnings and a nice current dividend yield of 5.8 percent. I also like its concentrations in consumer companies (29 percent) and industrials (22 percent).
The probability that the Trans-Pacific trade deal will become a reality fairly soon is high. Smart investors will get ahead of it.
Carlton Delfeld is managing director of Chartwell Partners, an alternative asset advisory firm, and vice chairman of the Pacific Economic Club. He can be contacted at [email protected].