Syria casts 'big black cloud' on emerging markets

CNBC

As tensions surrounding Syria's alleged use of chemical weapons intensified this week, emerging markets have taken a further pounding, dousing hopes for an end to the rout.

Reports that the U.S. is gearing up to hit Syria with three days of missile strikes as early as Thursday prompted a steep sell-off across global equity markets that started on Tuesday and persisted into Wednesday.

(Read more: Syria rattles global markets for second day )

According to Jack Bouroudjian, CEO of Bull and Bear Partners, Syria is another blow to emerging markets just as they were catching a breath.

"We are almost at a very near term bottom in emerging markets. I would not be surprised to see some of the fund flows work its way out of the U.S. market into emerging markets," said Bouroudjian.

"But there is a very big black cloud out there [now] - the Syrian situation has to get under control - there is a lot at stake here," he added.

(Read more: Syria is just the latest of the market's troubles )

Already, panic over an imminent scale down of U.S. monetary stimulus has pushed the MSCI Emerging Market index 13 percent lower in the last three months. Now, a fresh headwind in the form of geopolitical tension around Syria is exacerbating the declines.

Shares in Indonesia, the Philippines and Thailand officially moved into bear market territory on Tuesday while the Indian rupee (Exchange:INR=) on Wednesday plunged to a fresh lifetime low of 67.8 to the dollar, now over 23 percent weaker than it was at the start of the year. The Turkish lira (Exchange:TRY=) also hit a record trough of 1.9915 against the dollar overnight.

"The Syrian crisis feels like the spark the markets have been searching for...equities globally look set for a very rough ride over the coming months," said Evan Lucas, market strategist at IG.

Lucas said near-term relief for emerging markets looked unlikely, as in his view, the recent pain seen in India and Indonesia would likely spread to other emerging markets like Brazil and Turkey.

(Read more: Is taper talk really behind emerging markets rout? )

"This will be amplified by the Fed's first move on tapering, which will happen before Christmas, increasing the volatility for all markets," he added.

Not everyone's convinced of a long-term threat to markets from Syria, however.

"It [Syria] has the potential to unsettle equity markets... (but) it is not clear that we will see lasting disruption to asset markets, as that has not been the case in the past when we have seen these geopolitical flare-ups," said Todd Elmer, currency strategist at Citi.

-By CNBC's Katie Holliday: Follow her on Twitter: @hollidaykatie



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