2006 was a boom year for emerging markets: The iShares MSCI Emerging Markets Index ( EEM), a proxy for emerging markets worldwide, grew by 22%. Regional markets in Southeast Asia fared better still. The FTSE ASEAN Index, which tracks equities in Indonesia, Malaysia, Philippines, Singapore and Thailand, surged 31% last year, while the Shanghai stock exchange soared by over 125%.

But routine questions over whether this kind of growth is sustainable have taken on more serious tones amid a new round of political instability in Thailand specifically and weakness in emerging markets generally.

Doubts over the sustainability of last year's boom raise the question of whether 2007 is the next 1997, when Thailand's currency devaluation sparked the so-called Asian contagion: bouts of panic-selling in Asian markets that spilled over into other emerging markets and, eventually, developing ones as well.

"What's often forgotten, I think, is that the way we correlate risk in Asia is very high," says Sean Darby, head of Asian strategy at Nomura Holdings in Hong Kong. "We're almost certainly due for a correction this year."

Castor Pang, an equity buy-side strategist at the Hong Kong investment firm Sun Hung Kai, says the effect of Thailand's instability could once again become contagious, at least regionally.

"The situation in Thailand is probably likely to affect the economies nearby, like Malaysia and Indonesia," he says. "Whether the Dow and the Nasdaq can continue an uptrend for the whole year is the major factor which could affect whether Thailand, Singapore and Malaysia keep going up, because of the liquidity impact" if foreign investment pulls out in the region in favor of the relative safety of U.S. indices.

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