NEW YORK (The Street) -- Investors could forgo big gains in emerging markets if political turmoil in the Ukraine causes them to generalize about the asset class, fund managers warned.
Ukrainian protests began in November after President Yanukovych rejected a trade deal with the European Union in favor of closer ties with Russia. Riots have since escalated, contributing to uncertainty in world equity markets as the growth outlook for emerging economies falls into question.
But market strategists said investors commonly lump emerging markets into one asset class, with distinct difference between countries. Unrest in the Ukraine alone, for example, is not viewed as significant enough in itself to cause world equities to nosedive. Instead, it adds to a general picture of uncertainty around emerging markets and contributes to volatility.
ING U.S. Investment market strategist Karyn Cavanaugh said a Ukraine that forged closer ties with Russia instead of the European Union would be a country that was harder for U.S. corporates to do business with, given a relative lack of transparency."U.S. equities would do better if the Ukraine was more aligned with the EU," she told TheStreet, noting the bigger risk to equities was a broad-brush avoidance of emerging markets. While many fund managers avoid the so-called fragile five economies with high current account deficits -- Indonesia, Brazil, Turkey, South Africa and India -- Cavanaugh noted differentiation even between these nations, given depreciation in the Indonesia rupiah has seen exports improve while its GDP growth looks to be above 5%. The market strategist pointed to Mexico, Poland and Vietnam as emerging economies that presented promise, along with Peru, Oman and Sub-Saharan Africa for those prepared to take a longer-term view. Large American corporates are aware of the opportunity: Wal-Mart's (WMT - Get Report) South African arm recently said it planned to open 90 new stores across sub-Saharan Africa over the next three years as it targets growth markets including Nigeria and Angola. Marriott International (MAR - Get Report)and South Africa's Protea Hospitality Holdings also signed an agreement in January which will see Marriott pay about $186 million for Protea's three brands and management company, making the Nasdaq-listed company the largest hotelier in the Middle East & Africa. "A lot of the frontier markets (such as Africa) have not seen big outflows and are the recipients of hot money," Cavanaugh said. Many fund managers said emerging market woes are unlikely to erupt into a full blown crisis, but echo the IMF's warning on Wednesday over their risks to the still-fragile global growth picture.
--- Written by Jane Searle in New York