Yuan devaluation hits everyone from Tiffany to KFC

Years of surging economic growth that spurred sales of luxury goods — Louis Vuitton handbags, Tiffany rings, BMW 5-Series cars — as well as mundane items like KFC chicken and Kone elevators already had given way to the deepest slowdown since 1990. Chinese policy makers on Tuesday added to the pain for international companies by devaluing the yuan by the most in two decades, sending shares of automakers, luxury manufacturers and industrial companies slumping.

The policy shift reduces the value of their sales in China and makes the nation’s producers more competitive. While the devaluation may help revive growth in China, for now it shows how concerned the authorities are about the slowdown, and that there may be further pain ahead for companies operating there.

“China is clearly becoming a growing risk that materializes day after day,” said Anne d’Anselme, a money manager at Cogefi Gestion in Paris.

The effect on stocks was widespread. Among luxury-goods makers, LVMH sank 5.4 per cent in Paris, New York-based Tiffany & Co. declined 2.1 per cent, and Swatch Group AG, owner of the Omega watch brand, dropped 5.1 per cent. Auto-parts makers fell the most since mid-July, while BMW lost 4.3 per cent. Yum, which owns the KFC and Pizza Hut fast-food chains and gets more than half of its revenue from China, fell 4.8 per cent in New York.

Overall, the TSX closed down 51.72 points at 14,414.67 Tuesday, coming back from an early-session drop of more than 200 points. The Dow wasn’t so fortunate, dropping 212.33 points to close at 17,402.84.

At both LMVH and Tiffany, sales in Asia excluding Japan accounted for more than a quarter of sales in their latest quarters and were trending lower. Louis Vuitton sales in China, Macau and Hong Kong fell about 10 per cent in the second quarter, Paris-based LVMH, which also owns Moet champagne and Hennessy cognac, said last month.

One bright spot for luxury-goods companies has been that, even as sales in mainland China and Hong Kong suffered, Chinese travelers continued to spend when visiting Paris, New York and other cities. The devaluation of the yuan means their purchasing power outside China will be hurt, said Alessandro Migliorini, an analyst at Mirabaud Securities LLP.

“What really counts is what lies beneath the decision to devalue the yuan,” Migliorini said. “The most significant worry is the big picture, that China’s economy is weakening.”

Foreign automakers and parts companies working in China had enjoyed a long boom until the nation’s new-car market contracted in June for the first time in more than two years. The devaluation may add another hit to earnings when those companies bring profits back home.

Among other automakers, Daimler AG lost 5.2 per cent and Volkswagen AG fell 4.1 per cent Tuesday. The decline was 3.5 per cent at General Motors Co. and 1.9 per cent at Ford Motor Co.

“We believe that our exposure is limited and manageable, and do not expect that the devaluation will have a material impact on the company’s financial performance,” GM said in a statement Tuesday. Building vehicles for sale in each of its main markets creates “a natural hedge,” the company said.

For industrial companies, the devaluation is another headwind on earnings, piling onto slow global growth, lower oil and gas investment and sluggish consumer demand.

“It’s a cumulative effect in an already difficult environment,” said Karen Ubelhart, an analyst with Bloomberg Intelligence.

Shares of Kone Oyj, the Finnish elevator-maker that got more than a third of sales from China in the second quarter, dropped 3.5 per cent Tuesday. Just a month ago, the company had surprised investors by raising its full-year profit forecast while saying the Chinese market may remain stable this year even as the pace of new construction slumps.

“Given that we operate locally in China, the impact of yuan devaluation is not significant for us,” Eriikka Söderström, chief financial officer at Kone, said Tuesday in an e-mail. “There has been plenty of volatility in the foreign exchange market this year, and compared to that, this is a small correction.”

For technology companies, the devaluation in China can cut both ways. The nation is both the largest electronics manufacturing hub and the largest consumer of personal computers and mobile phones.

That means the policy shift can either deliver growth or bring it to a halt for a varied group of suppliers. Chipmakers Intel Corp. and Qualcomm Inc., which gets more than half its sales in China, both declined Tuesday.

“There’s a big difference between products that are intended to be sold and stay in China versus those that are just manufactured globally,” said Christopher Rolland, an analyst at FBR Capital Markets & Co.

Whatever the consequences for now, the important result may be if the devaluation eventually stimulates growth.

“If this is part of getting China’s economy going again, that would help,” analyst Ubelhart said. “But that’s not current. That’s more of a second effect.”