Yuan Devaluation: U.S. Winners and Losers

Last Tuesday, China reduced the yuan's daily reference rate by 1.9%, the largest devaluation of the yuan in nearly 20 years. The surprise devaluation weighed on U.S. markets, with benchmarks losing a minimum of 1%.

Companies with significant China exposure took a hit, and concerns about the world's economic environment heightened. However, the situation isn't the same for all U.S. companies, with some emerging as gainers after this decision.

State of Economy, Markets Forces Move

Despite a series of measures, the state of China's economy is a major cause for concern. Data on manufacturing released earlier this month has been disappointing in nature, indicating underlying China's economic weakness. One section of analysts opines that the market needs to rebound by itself for investor sentiment to improve.

Additionally, producer prices declined to the lowest level in six years in July. Exports meanwhile recorded a greater-than-expected decline. The country has also taken a series of measures to boost a flagging housing market.

Stocks with China Exposure Take Losses

The People's Bank of China's (PBOC) sudden move to devalue the yuan weighed down stocks with high exposure to that country. Leading the decliners was Apple Inc. AAPL, which experienced a 5.2% fall and weighed on all major indices.

Devaluation led to losses for other companies with significant exposure to China. Yum! Brands, Inc. YUM and Caterpillar Inc. CAT lost 4.9% and 2.6%, respectively. Shares of General Motors Company GM declined 3.5% despite a statement that this development would impact business only to a "limited and manageable" extent.

Threat of Currency War

PBOC's decision to reduce the yuan's daily reference rate by 1.9% is the latest in the series of attempts to prop up the economy. To international analysts and market watchers, it reflects the extent to which authorities are concerned about the state of things. However, globally there are fears that the move may spark off a currency war.

In this situation, it is likely that China may devalue its currency again in the coming months. This is expected to trigger reprisals in the form of similar lowering of exchange rates by currencies worldwide. China seems to be following in the footsteps of Europe, which has taken such action recently, also to boost its economy.

Meanwhile, the U.S. is looking to slowly ease monetary stimulus. One view is that the devaluation is likely to put off a September rate hike. Others feel that this is a blip and the Fed is ready to make its move.

PBOC Alleviates Concerns

The yuan freely traded offshore +1.2% on Thursday. An assistant governor of the PBOC commented that the exchange rate adjustment following the change in the method of setting rates was "basically already completed." Further indications were provided that the yuan would move either way, with the PBOC stepping into correct both excessive increases and declines.

A deputy governor of the PBOC said the central bank will maintain a consistent exchange rate. Steps to adjust the rate will be taken only when volatility rises considerably. The central bank is moving toward a more market determined method of fixing the exchange rate. This takes into account the last day's closing spot price, the movement of other important currencies and the supply-demand situation for foreign exchange.

Gainers and Losers

Despite such assurances, the outlook for the yuan continues to be weak. The currency slumped by the highest extent in 21 years following China's government's move to increase the market's role in determining its exchange rate. The outlook for the country's economy continues to be weak and it seems that further devaluations could be in the offing.

Losers

The crisis in China's economy and the subsequent devaluation is a massive hit for luxury brands. High fashion brands Tiffany & Co. TIF have lost 3.3% over the last five days and with good reason. More than 10% of their sales are generated from China. Shares of Coach, Inc. COH have lost 3.5% over the same period.

Semiconductors are another sector where sales made in China make a significant contribution. Shares of Micron Technology, Inc. MU lost 4% last Tuesday following the devaluation announcement. Texas Instruments Inc. TXN and Altera Corp. ALTR also took a hit.

Shares of companies which mine raw materials also declined on concerns that a declining yuan will increase the cost of raw materials. This comes at a time when demand is already at a low. Additionally, it will reduce the affordability of such inputs for China, which is a major consumer. Freeport-McMoRan Inc. FCX slumped 14% while Joy Global, Inc. JOY lost 5.5%.

Shares of KFC's parent Yum! Brands lost nearly 5% since it generates half its sales from China.

Winners

Those who source products and inputs from China are the clear winners from this development. This includes Wal-Mart Stores Inc. WMT, which purchases goods worth billions of dollars from the country. Shares of the company gained just under 1%, defying the markets' decline on last Tuesday.

The outlook for Apple is not that clear. Shares of the company lost around 4% on Aug 11 since a weaker yuan will raise the prices of its products in China. However, it will be able to source its hardware at much cheaper costs which will prove to be an advantage across all markets.

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