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What the EM sell-off means for European stocks

As pressure remains on emerging markets, Goldman Sachs has warned over European equities' sensitivity to the region, with some indexes particularly exposed.

European stocks are more sensitive to emerging markets than their U.S. counterparts, Goldman said in note on Friday, and were generally highly exposed to the region's end markets in sales terms.

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"The prospects for EM (emerging market) economies and the timing of any recovery in their markets is an important consideration for investors in European equities," analysts led by Caesar Maasry wrote.

Emerging markets have taken a battering over the past week, amid growing worries about some countries' fundamentals, and the winding down of monetary stimulus in the U.S. On Wednesday, the Federal Reserve confirmed that it would scale back its monthly bond-buying program — which has boosted risk sentiment and emerging markets as a result — by another $10 billion.

(Read more: Emerging market rout 'a long time coming': Rhodes)

The sell-off steadied on Friday, but concerns about the region continue, leading investors to look to developed markets like Europe as an alternative.

The indexes in Europe most affected by emerging market (including Asia) movements were Switzerland's SMI, with 31 percent sales exposure to the region, Norway's OBX, at 28 percent, and Spain's IBEX with 26 percent exposure.

London's FTSE 100 has 24 percent exposure, while the Europe STOXX 600's sales exposure came in at 18 percent, according to Goldman.

Outflows to Europe

But even before the worst of the rout took hold, money was pouring out of emerging markets and into Europe, according to EPFR, which provides global asset allocation data.

(Read more: World stocks hit by euro zone, emerging markets woes)

Emerging markets equity funds extended their longest outflow streak since 2002 over the week to January 22, it found, with Europe equity, bond and money market funds taking in more than $22 billion.

Some analysts have argued that despite their exposure, European markets should remain relatively unaffected by the emerging market tensions.

"EM concerns are really dominating all thinking at the moment, and the concern is what kind of contagion will we get," Bill Blain, senior fixed income broker at Mint Partners told CNBC.

"It hasn't happened yet to the extent that it could. It you look at the performance of the developed markets we haven't seen the kind of ructions that we have seen (in the past)."

Dan Morris, global investment strategist at TIAA-CREF, told CNBC that despite the emerging market pressure, was optimistic for equity returns in developed markets this year.

(Read more: Could this currency sell off like Argentina's peso?)

"Overall we think the environment is relatively benign and there's still opportunities," he said, adding that "the potential probably is actually in developed markets this year rather than emerging markets."

Basic resources weigh

Goldman Sachs stressed that the markets in Europe most sensitive to the region had a high weighting of basic resource stocks – which has the highest exposure of any sector to emerging markets.

In the STOXX 600, 38 percent of basic resource stocks were exposed to emerging markets, followed by the chemicals and technology sectors – both at 28 percent.

Goldman was quick to point out, however, that it was important to differentiate between Europe's emerging market-exposed stocks.

"Not all EM exposed companies have performed equally. The relative performance has varied depending on whether companies are facing consumers or industrial customers," Maasry said.

In response to the recent heightened risks in emerging markets, therefore, the investment bank made two changes to its equity recommendations.

Firstly, it took off its recommendation to be long the FTSE 100 versus the SMI.

(Read more: Why people fear a shadow banking crisis in China)

"While both indices have high EM-exposure, FTSE 100 exposure is far more industrial and commodity-related which we see as more vulnerable," Maasry said.

And secondly, it removed its recommended long position in luxury goods relative to food products.

"While we continue to be positive on the longer-term prospects for this sector (luxury goods), and for EM consumer exposure more generally, current uncertainties raise the risks to this idea in the short term," Maasry added.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishopand Google

Correction: This article has been updated to reflect that Dan Morris is the global investment strategist at TIAA-CREF.

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