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Emerging markets: dissecting the good from bad

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Bearish sentiment has gripped emerging markets in recent weeks, leading many strategists to draw a clear line between the good and the bad in Asia.

Expectations that the U.S. central bank is set to start winding down its flow of easy money has sent investors scrambling out of riskier emerging markets in recent months.

In Asia, India and Indonesia have been left battered and bruised with both currencies and stock markets falling sharply this week, raising concerns that the contagion could spread.

(Read more: Brutality scorecard: Which emerging stocks have it the worst?)

The state of a country's current account is proving the key to which markets investors stay in and which ones they flee, analysts say.

"A clear dividing line has emerged in terms of whether an economy is running a current account deficit that is widening or a current account surplus that is increasing," said Tim Condon, head of research for Asia at ING bank.

(Read more: Are emerging markets facing an 'abyss'?)

"Those with a current account deficit are in the 'bad camp,' they will go on re-pricing until tapering has run its course…I believe we are close to that, but the discrimination among emerging markets will continue until that point," he added.

Both India and Indonesia run large current account deficits and have struggled with pushing through structural reforms, with India also grappling with sluggish economic growth.

(Read More: Rupee selling now 'out of control')

That puts the two economies in the "bad camp" and helps explain why they have borne the brunt of the sell-off in emerging markets assets in Asia.

Analysts say southeast Asian neighbors Malaysia and Thailand are next in line to join the "bad" camp. Data on Wednesday showed Malaysia's current account surplus is falling fast, while Thailand is running a current account deficit.

(Read more: Wonder why ringgit's getting crushed? Check out this chart)

High foreign ownership of government bonds also makes Malaysia and Thailand vulnerable to an exit of funds.

The good camp

Countries in the "good camp" are those with more healthy current accounts, such as South Korea and Taiwan.

"Any country with a current account surplus, a low budget deficit or preferably a surplus, are the ones who can ride through this [turmoil]," said Shane Oliver, chief economist at AMP Capital.

"I suppose you could say look at Korea and Taiwan and ignore the rest," said Oliver, adding that China could also belong in the "good camp."

"China isn't too heavily reliant on foreign investment. It has a relatively small budget deficit and its debt problems are not as bad as people think," he added.

(Read more: Could this trigger a 'flash flood' back into emerging markets?)

Japanese investment bank Nomura's chief equity strategist recently increased his recommendation on Taiwan and South Korean stock markets.

"The current account surpluses in Korea and Taiwan have been increasing partly because of weaker domestic demand, which reflects not only the more advanced stage of their economies and older populations, but also reasons such as improving terms of trade and relatively prudent fiscal policies," said Rob Subbaraman, chief Asia economist at Nomura.

South Korea and Taiwan both reported current-account surpluses in the second quarter at 5.1 percent and 11 percent of gross domestic product (GDP) respectively.

(Read more: Emerging markets mauled by bearish investors)

By contrast, Indonesia's deficit stood at 4.4 percent of GDP in the second quarter, while India's reached a record high of 4.8 percent for the fiscal year ending March 31.

"It is definitely a trend we are seeing," said Andrew Su, CEO of Compass Global Markets, referring to the division between "good" and "bad" countries.

"We expect stronger emerging markets like Singapore to do well out of this trend, due to the re-distribution of assets," he added.

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

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