Remember BRIC?
I'm an acronym guy. Love them. Think FANG or FAANG -- Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Google, now Alphabet (GOOGL) -- and now WATCH, which is Walmart (WMT) , Amazon (AMZN) , Target (TGT) , Costco (COST) and Home Depot (HD) .
I wish I had had the perspicacity to have come up with BRIC -- Brazil, Russia, India and China, the acronym coined by Jim O'Neil, a former economist and delightful visionary from Goldman Sachs. O'Neil coined it 18 years ago, but it didn't come into general parlance until the beginning of this decade.
That was when, if you were an industrial, you either dove into BRIC or you were left behind, struggling with the slow growth and dwindling manufacturing base of the United States.
One by one, though, these BRIC countries have become as hazardous to a company's financial health as you can get.
Having exposure to Brazil means having exposure to an economy in perpetual recession with a currency that can go kerflooey in any second, not unlike the government itself.
Russia? It's now run by a confiscating dictator, some say the richest man in the world, who has fashioned a kleptocracy that is a nightmare for any business. Don't believe me? Go read the release of the last quarter from a squeaky-clean International Flavors & Fragrances (IFF) . The company recently paid $7.1 billion for Frutarom, an Israeli-based flavors company, only to find out that its management apparently knew about payoffs to do business in Russia.
Everyone has been trying to crack into India forever. Apple needs India because it has the fastest-growing youth cohort in the world. It has been a big disappointment and I think they've had a better experience than most. Walmart paid $16 billion for Indian e-commerce company Flipkart and all I can say is I wish them well. Nobody has been able to come up with a way, at scale, to make money in that country.
Ah, but there's always China. That's the market. The one that worked. The one that has the most mouths to feed, buildings to build, roads to pave and air miles to travel, stores to shop, coffee to drink, sneakers to wear, diapers to change, credit to extend and calls to make. That became the saving grace of BRIC, the one that provided the most upside, the one that companies salivated over, the one that gave your stock a much higher price-to-earnings multiple.
One by one, though, as China grew, the options to make as much money shrunk as China demanded more than its fair share of the upside while stealing their intellectual property. Companies came to see China as a double-edged sword -- a huge market to sell into, but at the same time a market with terminal implications as pernicious, bogus joint ventures allowed Chinese counterparts to learn the business, share the secrets and ultimately exploit and appropriate the technology for their own.
Until now.
President Trump, who always had seething contempt for the way China did business long before he became president, is no longer accepting of the bargain. It's too one-sided and it's fueling military, not just economic, development and powering a challenge to U.S hegemony, not just earnings per share. He has reduced your earnings in every way possible if you do business in China. And so many companies do business in some form or another that it's enough to inflict unfathomable pain on a company's earnings per share.
So, the C of BRIC has now become the last straw toward a shrinking, not expanding, multiple.
What's happening now, with this earnings season, is we are putting a pencil to unfathomable. In some cases the pain is deep; in other cases the pain is manageable.
The best examples? Companies that are deeply intertwined with China are getting hurt from all sides. Semi multiples are shrinking. Consumer product companies are wary. Cellphone-related businesses are being scrutinized in a way that says whatever upside China once offered is now downside.
Only one company, Starbucks (SBUX) , has bucked the trend in large part because of decisions made by founder Howard Schultz to embrace Chinese culture wholeheartedly.
On the other hand, pure manufacturers who relied on China for their growth, once-lauded companies such as FedEx (FDX) , 3M (MMM) and Emerson (EMR) are now despised. No one knows what to do with Boeing (BA) -- anyone who tells you otherwise is faking.
I think things get worse before they get much worse with China. There's no reason to make a deal yet. The numbers are too good for Trump, both economically and politically. But one thing is for certain: BRIC exposure means your earnings are suspect, you are guilty until proven innocent and we will now pay up for purely domestic companies with no apparent ties to China.
Everyone else? They've become a source of funds to buy the non-China portion of the S&P.
