Winners And Losers With A Stronger Yuan

News of China's plans to relax the yuan's peg to the U.S. dollar, looked like market-moving news on the surface, but judging by how U.S. stocks sold-off as enthusiasm over a stronger currency waned, it is apparent that yuan appreciation is not going to be a remedy for equity bulls.

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That's not surprising. After all Beijing wasn't going to relax the peg if it meant dramatic near-term appreciation against the greenback, a situation that would hurt Chinese exporters. So after initial enthusiasm dissipated, traders were pricing in a 2.7% jump for the yuan against the dollar over the next year, compared to a 1.8% increase as of last Friday.

The reality is yuan appreciation is going to materialize at a snail's pace, not break-neck speed, but there are some sectors and stocks that stand to win and lose from a stronger Chinese currency. Let's have a look at a few. (For some background on China, read Investing In China.)

Made in China
Like it or not, China's access to cheap labor has made the country an exporting powerhouse and those low labor costs have benefited plenty of U.S. retailers. The downside of this is that a strong yuan makes Chinese goods more expensive to import to the U.S., so it wasn't surprising to see stocks like Best Buy (NYSE:BBY), Home Depot (NYSE:HD) and Wal-Mart (NSYE:WMT) all tumble on the yuan appreciation news.

On the surface, retailers may appear like losers, but for those that actually operate stores in local Chinese markets, a strong currency could hold some promise. Among retailers that could benefit from a Chinese consumer with more purchasing power, Coach (NYSE:COH) comes to mind. The maker of high-end leather handbags and wallets is looking to boost its sales in China to $250 million by fiscal 2012, up from $100 million in fiscal 2010.

Along those same lines there is Tiffany (NYSE:TIF), which operated 11 stores in mainland China at the end of the first quarter. Tiffany's sales in the Asia-Pacific region ex-Japan surged 505 to $122.3 million during the first quarter and as the number of millionaires in China continues to soar, Tiffany represents an ideal strong yuan play.

Stocks of Steel
U.S.-based steelmakers have had a contentious view of China for sometime now, but names like AK Steel (NYSE:AKS), Steel Dynamics (Nasdaq:STLD) and U.S. Steel (NYSE:X) all traded higher after the yuan news broke. How much a stronger Chinese currency helps U.S. steelmakers remains to be seen and the benefits may eventually prove to be nothing to write home about.

Despite frequent complaints, Chinese steel exports are not a significant thorn in the side of U.S. producers, which makes sense since China is the world's largest steel producer, but most of the steel it produces is consumed in China.

Picking and choosing steel winners on the back of a revalued one may prove difficult, if not disheartening, so it might be advisable to take your cues from the sector at large and track the Market Vectors Steel ETF (NYSE:SLX). (Learn more in Top 6 Factors That Drive Investment In China.)

Mining and Materials Could Win
Caterpillar (NYSE:CAT), the world's largest maker of mining and construction equipment, relies on China for a significant chunk of its sales. In fact, China is the company's top export market and a stronger yuan could help boost exports of Caterpillar's heavy machinery to China. The company recently reported an 11% jump in global dealer sales, led by strong growth in the Asia-Pacific region.

The Market Vectors Coal ETF (NYSE:KOL) could be another winner as a strong yuan would make coal cheaper to import into China. China is the world's largest coal consumer, so keep an eye on U.S. coal producers with exposure to China.

Plenty of Choices, But ...
Investors have plenty of options when it comes to picking stocks that can be potential winners from a stronger Chinese currency, but if the market's reaction to this is a sign, and it probably is, don't expect big returns from a trend that could take several years to play out. All the stocks mentioned here could be winners as long as Chinese demand for their products remains strong going forward. (For more information about Chinese monetary policy, read What A Rising Yuan Means For You.)

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