German Car Stocks Dive As China Move Possibly Misunderstood.
“the impact on 2015 profits for the Germans would be zero because they are fully hedged”
German car stocks BMW, Mercedes and Volkswagen, heavily dependent on China for their profits, dived on European markets after China announced what appeared to be 1.9 per cent devaluation of its currency against the dollar.
By mid-morning in Europe BMW had lost 3.4 per cent of its value, Mercedes parent Daimler 3.8 per cent, and Volkswagen nearly four per cent. Volkswagen depends on China for more than half its net profit. BMW and Mercedes make big money in China too.
News organisations like the BBC had reported the move by China as a massive blow to those companies doing business in China.
But investment researcher Evercore ISI described the move as “not material” for the Germans.
Evercoe ISI said the impact on 2015 profits for the Germans would be zero because they are fully hedged.
“Looking to 2016, we see the impact as immaterial. We estimate that the 1.9 per cent devaluation would result in BMW’s positive tailwind from (foreign exchange) in 2016 being reduced by about 135 million euros ($149 million) or 1.2 per cent of 2016 EBIT, Daimler’s tailwind by 137 million euros, and VW’s by 126 million ($139 million), or 0.7 per cent of estimated 2016 EBIT), Evercore ISI analyst Arndt Ellinghorst said in a research note.
Investment bank UBS wondered if China’s move might lead to a long-term weakening of the yuan.
“How China sets its daily fixing and manages (foreign exchange) market flows in the next few days will be very telling,” it said in a research note.
“We think today’s moves signals a new government willingness to let the (currency) slide against the dollar than previously. We now expect (U.S. dollar versus yuan) trading at about 6.5 by end 2015 instead of 6.3 as previously envisaged, and 6.6 at end 2016,” UBS said.
Reuters Breakign Views, in a preliminary comment, didn’t think it was much of a bid deal either.
“A surprise 1.9 percent devaluation of the yuan won’t have much effect on the real economy, but may show willingness to help exports through a cheaper currency. To unwind global imbalances, the yuan really needs to be stronger. China just isn’t yet ready to take that medicine,” it said.