Yuan devaluation provides buying opportunity for advisors

In what’s likely much ado about nothing the Chinese government’s surprise 2% cut in the value of its currency hit commodity stocks hard Tuesday making them even cheaper to buy for those clients willing to take on some more risk

China’s move to make its exports more competitive by devaluing the Yuan by 2 per cent had a negative effect on Canadian stocks Tuesday sending resource stocks tumbling by as much as 3 per cent on the surprise news.

The sky, however, is clearly not falling. In fact, advisors with clients who are able to handle above-average risk might want to be buying Wednesday as calmer heads prevail.

"China's probably going to have a 5 or 6 percent growth rate. It's a managed economy. It's not your free enterprise economy, and they will get their growth one way or another," said David Cockfield, managing director and portfolio manager at Northland Wealth Management, who is not expecting any major spillover effect. "I just don't see a huge impact. It's too far away ... It's probably wise on their part to do that if they want to keep (their economic growth) at 5 or 6 percent."

One industry that is sure to benefit from China’s desire to boost exports are Canadian retailers who import goods from our second-largest trading partner. Thanks to the devaluation cost of goods just got 2 per cent cheaper. Dollarama, whose operating margins are in the high 30s could stand to benefit on the bottom line by as much as 10 per cent on the move.

Not surprisingly, Dollarama’s stock was up by almost 1 per cent Tuesday although on lighter than average trading. Meanwhile, most stocks (just 43 were up or flat) in the S&P/TSX composite index were down yesterday.

While it’s possible the Chinese economy will continue to slow, it’s just as likely as Cockfield intimated earlier, that its devaluation of the Yuan will ensure its economy stays on course making the concerns about the wilting buying power of the Chinese consumer somewhat muted.

One day’s trading obviously does not make a correction. However, for those advisors willing to wade into the uncertainty, a buying opportunity could be upon us.