The biggest risk to emerging markets isn't Turkey — it's China

While investors have been focusing on Turkey as a source of contagion in emerging markets amid a plunging lira and political turmoil, we see the outlook for China as a much bigger problem.

China represents 25 percent of the MSCI Emerging Markets Index, so what happens in China doesn't exactly stay in China. It has a more outsized impact than Turkey on investors; Turkey accounts for just 0.5 percent of the index.

With the trade war looming, China's outlook has been called into question. Concern of contagion is mounting as Chinese technology stocks are stumbling in the face of continued threats out of Washington and Tencent's big earnings miss.

King dollar weighs

Another chief concern for China is the strengthening U.S. dollar.

Until China's wage growth picks up meaningfully to increase domestic consumption and demand, China remains dependent on its exports, which are hurt by a strong dollar. That impact shows few signs of abating, since the dollar's outlook remains strong in the midst of the Federal Reserve's tightening path.

Furthermore, as interest rates keep rising in the U.S., China is vulnerable to capital flight from domestic investors.

We believe these concerns are worth watching, and remain overweight in U.S. equities until we have further visibility into how the trade war will play out for China.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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