By Chris Vellacott
LONDON, Dec 12 (Reuters) - Emerging markets' popularity with investors is ebbing as a strong dollar lures money away and commodity prices fall, but some governments promising tough economic reforms may stem the flow of capital leaving.
India and Indonesia currently look the most promising, fund managers say, following the election of pro-business governments on a ticket to introduce reforms that will open up state companies to foreign investment and cut red tape.
"Reformers are performers," said Bill Street, head of investments for Europe, the Middle East and Africa at State Street. "You need to differentiate your exposures in emerging markets .. We have some select funds that pull out reformers. We've seen some good reform happening in India and Indonesia"
In India, Prime Minister Narendra Modi's government plans to sell state stakeholdings in major companies, shake up labour laws and cut populist subsidies on fuel.
Craig Botham, an emerging markets economist at UK fund manager Schroders, said he expected success on those fronts "to lead to greater investment, picking up momentum going into 2016" but was only "cautiously positive" on similar claims by the government in Indonesia.
So far the two countries have had mixed success in retaining foreign portfolio capital.
According to Lipper -- a Thomson Reuters company that tracks the funds industry -- net sales for India themed investment funds domiciled in Europe amounted to 303 million euros in September, making them the one of the fastest selling emerging market investment products.
In contrast, Indonesian-themed funds saw an outflow of 64 million euros. The country's president Joko "Jokowi" Widodo, who was elected in July, does not hold a parliamentary majority -- limiting his ability to deliver on his promises to liberalise the economy and attract more foreign investment.
OUT OF FAVOUR
Investors are also unenthusiastic about prospects for Turkey, where politicians hoping to win elections scheduled for mid 2015 are unlikely to inflict economic pain on voters despite recommendations by the IMF to tighten fiscal and monetary policy, as recommended by the IMF.
"Economic populism remains a risk in Turkey, and the country's structural reform agenda will likely remain stalled ahead of parliamentary elections in June," JP Morgan said in a research note.
European equity funds focusing on Turkey saw a net outflow of 68.5 million euros in September, according to Lipper -- a trend also reflected in the falling value of the Turkish lira in 2014, down around 5 percent against the dollar.