Ghosts of '97 Continue Haunting Emerging Markets

But heightened political risk is not the only threat to the region. Currency traders fear that if the dollar continues to weaken, the Federal Reserve will take action to shore up the greenback, via rate hikes and/or aggressively buying Treasury and agency securities, resulting in dramatic outflows of capital from the region. Such a scenario could prompt a vicious cycle in the Asian economies, because if asset prices nose-dive, liquidity would also dry up, compounding the effects.

On top of this, inflated asset prices after several years of big gains can lead to swift and painful corrections. For example, China Life Insurance (LFC Quote) ADRs soared nearly 250% last year but fell more than 8% Tuesday as investors became cautious following the enormous first-day gains of the company's dual listing on the Shanghai stock exchange.

"My personal view is that people's appetite for risk is higher than it was in 1997," says Cliff Quisenberry, who manages $803.42 million for Eaton Vance's emerging markets fund in New York, Parametric Portfolio Associates, which returned 37.18% in 2006. "On the other hand, you get enough of these drips and drabs and people get antsy about emerging markets in general."

Falling commodity prices -- notably crude -- are another big risk to emerging markets such as Russia and Latin America, where local economies have been able to pay down national debt on the back of the 2002-2006 surge in the price of oil. Many investors, especially in Asia, believe it is crude's fall -- not Chavez's comments about nationalizing Venezuela's economy -- that has pulled down emerging markets of late.