As the Federal Reserve appears closer to an interest rate hike—maybe as early as next week—hedge fund titan David Tepper, along with many economists, warn of potential turmoil ahead in emerging markets and the stocks whose fate is tied to those countries.
"A few years back, somebody said these BRIC companies were great, so you'd want to look at the U.S. companies with BRIC (Brazil, Russia, India, China) exposure," Tepper said Thursday in a CNBC interview.
"It's great to be standing on top of that BRIC and have a higher P/E, but when the water is rising, that's not such a great thing, because you can drown with that BRIC," said Tepper, whose Appalossa Management hedge fund manages more than $20 billion.
Even though the Fed has advertised for months its intention to increase rates for the first time since 2006, the actual increase should trigger a capital flight from emerging economies into the U.S. dollar and dollar assets.
For U.S. investors to avoid this problem, it's not as easy as taking money out of international equities. Many U.S. companies hiding in domestic portfolios have big exposure to these troubled economies, and their shares could get whacked by the Fed.
On the flip side, many domestic stocks could thrive in this environment.
As highlighted below, shares of companies like Caterpillar, Halliburton and Dow Chemical, which derive at least 20 percent of their sales from emerging markets, are down more than 15 percent in the past three months, compared with a loss of 7 percent for the S&P 500. Those losses could get bigger if the Fed hikes.