By Vishesh Kumar, contributor
FORTUNE — Anxiety about another global recession is on the rise amid downbeat economic data from the U.S. and a resurgent European debt crisis. And that has investors scrambling to find what Bill Gross of bond giant Pimco calls the ‘cleaner dirty shirt’ — assets that might be less tainted than others — as the storm clouds gather.
With much of the developed world stalling, many commentators see the usual basket of fast-growing emerging markets like China, India, Brazil and South Korea as avenues for continued growth.
But investors should dig deeper before simply seeking shelter abroad. Not only are financial markets overseas likely to get hit if risk tolerance evaporates as it did in the wake of Lehman Brothers, but some economies are far more dependent on global growth than others.
Countries like China and Brazil that have done so well by supplying the global economy with manufacturing and raw materials may be hit hardest. A much poorer and insulated economy like India’s, though, could weather the storm far better and even see a silver lining if major obstacles like nosebleed inflation rates decline.
While China’s red-hot growth rate of nearly 10% gets plenty of applause, for example, its economy is dependent on investments and exports, leaving it highly vulnerable to a global slowdown.
Indeed, China’s GDP expansion fell by nearly half to 6.8% in the fourth quarter of 2008 from 13% in 2007. The country responded with a massive $586 billion stimulus package to keep growth rates and employment at levels that its rapid urbanization requires.
This type of quick fix will be far more difficult this time around and the country is still facing the consequences of the last dose. The frequently questionable and politically motivated spending to prop up growth has led to growing concerns about China’s own debt situation.
Along with being heavily dependent on the U.S. and Europe for export markets, China also has deep financial exposure to the troubled regions through its massive foreign exchange reserves.
Beijing’s nervousness amid the U.S. debt debate was understandable — it has to keep buying Treasury bonds — as were its efforts to stem the eurozone crisis, since it desperately needs an alternative to the dollar. But vast stockpiles of suspect foreign assets can hardly be reassuring to a country facing the prospects of seeing its own debt downgraded as the chances of a need for a recapitalization at home rise.
Other export-oriented economies are also likely to get hit hard by another recession. An already slowing South Korea saw its stock market tumble 4.4% on Monday in the wake of disappointing U.S. data. Commodity heavy Brazil, meanwhile, had to cut interest rates despite steep inflation in a bid to counter sharply slowing growth.
The domestically-oriented and consumption-driven Indian economy, on the other hand, has many more defensive characteristics. And a recession may even help alleviate what may be at the top of its long list of problems: rampant inflation.
Inflation rates of 9.22%, among the highest levels in Asia, have prompted the Reserve Bank of India to raise rates 11 times in the last 18 months.
Some drivers of inflation like low agricultural productivity, crop loss due to poor infrastructure, and persistent government deficits are structural and will take time to work out, says Sunil Asnani, co-manager of the Matthews India Fund.
But a global slowdown could help tamp inflation by bringing down the prices of key inputs like oil and commodities.
Beyond major issues like inflation, the country has features that look increasingly attractive in a world were growth is getting harder to find.
GDP per capita of about $1,100 is less than half of China’s and about one-seventh of Brazil’s. For all the talk of a growing middle class in India, nearly 38% of its population lives in poverty.
The financial crisis tends to corroborate its ability to muddle through a global recession. Growth slowed from 9% to 6% — about half the crunch in terms of percentage points that China saw and with a fraction of the stimulus spending required to reaccelerate growth.
Asnani points to plenty of risks in the near term. A flight from risky assets would likely batter the Indian market and the loss of capital could deliver a further blow to the real economy.
Still, a panicked sell-off could provide an attractive entry point if investors flee risk and ignore the underlying economy’s ability to plod through a downturn.
For all its problems, India could offer one of the cleaner dirty shirts if the world economy faces another sharp downturn. Not only do other emerging markets have plenty of their own stains, they are far more exposed to future spills from the rich world as well.
