After a strong start to the year, Apple Inc. (NASDAQ:AAPL) has been correcting sharply in the last few weeks. Readers have many excellent sources of research on AAPL. Still, a point that has not been garnering enough attention (and particularly pushback) has been the generalized contention in the financial media that the Chinese “devaluation” may represent a major negative for the outlook of the largest company in the world by market cap. The goal of this brief note is to give a bit more perspective on last week’s move by China’s central bank (the PBoC) and highlight a couple of reasons why it will not be a meaningful long-term negative for AAPL.
There has been substantial global press coverage of the decision early last week by the PBoC to devalue the yuan or RMB. The Chinese currency did indeed weaken vis-à-vis the US dollar by almost 3% in the five trading days following the PBoC’s decision on the way it determines the currency’s daily fixing, according to Bloomberg. Furthermore, some additional near-term weakness is possible. Still, rather than a devaluation like the ones we have come to know so well in emerging markets, this is the next logical step in the path toward currency market liberalization in China. Chinese policymakers had made it clear they wanted to move in that direction, and longer term, the RMB should be more of a two-way bet.
The Chinese currency had been appreciating significantly in the last few years. Much weaker than the currency of the Hong Kong territory (the US currency-pegged Hong Kong dollar), the RMB or yuan shot through that other Chinese currency as the yuan appreciated meaningfully even against the (recently) strong US dollar (let alone the currencies of other emerging markets). I do believe that the goal of Chinese policymakers is to have a more market-determined exchange rate, which in the end will fluctuate up and down against global reserve currencies. Chinese policymakers want the IMF to consider the RMB for inclusion in the Special Drawing Rights basket. The IMF, for its part, had generally positive comments on the path of Chinese policymaking in the immediate aftermath of the PBoC’s decision last week.
Since the US central bank is widely expected to raise the Fed’s fund rate in the not-too-distant future, the timing by Chinese policymakers likely has to do with fears that a currency overly pegged to the US dollar could exacerbate deflationary pressures in China. Still, the Chinese government values stability above all else, and it’s unlikely to want too volatile a currency or a yuan that depreciates sharply against other key currencies. China continues to sit on the largest FX reserves worldwide, and the PBoC did indeed use some of those to intervene in the FX market most recently to prevent a quick overshooting by the yuan.
Will Chinese currency weakness have a major negative impact on Apple?
My favorite stock for the long term Apple has been under meaningful pressure of late. Besides much tougher comps (for iPhone 6 and 6 Plus) sales later this year, market participants cite a disappointing Apple Watch launch and more recently the weakening Chinese economy, with the RMB “deval” to boot. China-related concerns, in particular, seem overdone. While the Chinese economy has indeed slowed, it’s but one of the sources of long-term growth for Apple, and the slowdown is unlikely to have a meaningful impact on demand, given the “aspirational” nature of Apple products in China (and elsewhere).
Even more overblown seem the concerns having to do with the falling Chinese currency. I do not believe the RMB will weaken significantly, and even if it did, the concerns stem from the single focus on the revenue impact from a weaker yuan. What about the impact on costs? A much higher percentage of Apple’s costs than of its revenues is linked to China. Still, I do not wish to exaggerate this impact. Chances are that most if not all of Apple’s supply contracts in China are dollar-based. But then too, Apple prices its products in China based on the level of the US dollar, and it’s unlikely that a price increase of some 10% would dent demand for aspirationally-driven Apple products. After all, many Chinese were flying to the US to get the iPhone 6 and Plus, and the secondary market price for that product before it launched in China was at a significant premium.
The Chinese economy is indeed slowing from its torrid pace of growth of years past. Still, even 6% GDP growth now translates into more dollars being put into China’s economy each year than 10% growth added 10 years ago due to a much larger base from which the economy continues to expand (at a pace that would delight most other countries). The Chinese middle class alone now dwarfs the size of the entire US population. Apple products are no mass market item anywhere, let alone in China. The company prices its products at a premium, which gives them a near-luxury status. This largely insulates Apple’s aspirational nature from low-end competition. Apple has a global pricing power that’s the envy not only of other tech players, but even of most consumer goods companies. Don’t be swayed by the negative consensus on the impact of China’s “devaluation” on the long-term prospects of AAPL, the current weakness represents an excellent entry point for long-term investors.
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