Yuan some, you lose some
02 September, 2015
In August, China unexpectedly devalued its currency (the "yuan") by around 3%, to its lowest level in four years. While there appear to be two schools of thought, (Is this China joining the currency wars with a competitive devaluation or is it part of a long term process towards a market based exchange rate?) the likelihood is that the Chinese currency will continue to weaken due to the fragile state of the broader economy. This will have varying impacts on portfolio holdings. Here we look at the effects on Alibaba — a Chinese company listed in the US, and Nike — a US company that sells goods to China.
In the case of Alibaba, a weaker yuan impacts the company in a number of ways. Alibaba reports in US dollars so a declining yuan lowers their reported earnings by the amount of the currency decline. However, a lower yuan increases the cost of imports which makes goods sourced locally more competitive, and this benefits Alibaba's revenue. Additionally, Alibaba generates 10% of revenues from Chinese merchants selling offshore so will be a net beneficiary of a lower yuan through higher commission revenue. So, while a lower currency reduces Alibaba's profits in US Dollar terms, the net impact is less severe due to these offsetting factors.
The same applies to Nike. Around 10% of Nike's revenue comes from sales to China and will be translated to US dollars at a lower exchange rate thus decreasing sales and profits in US dollar terms. However, Nike has a significant manufacturing base in China (approximately 25% of footwear and apparel) and the lower subsequent costs will improve margins and partially offset any negative revenue impact.
At Fisher Funds we focus on the medium term and when considering the impact of currency movements, our focus is firmly on the impact this may have on the "moat" or competitive position of our companies, their customers, and their rivals. We believe that is a key driver of long-term performance.