FUND VIEW: Georgia has "huge potential": Avaron

HELSINKI (Reuters) - Georgian firms that rely on domestic demand have huge potential, but investor perception of risk is likely to hit investment, a managing partner at emerging Europe boutique asset manager Avaron said on Monday.

Tallinn-based Kristel Kivinurm-Priisalm at Avaron, which manages 60 million euros ($90.2 million), said investment in Georgia had also been restricted by the lack of listed stocks.

"In Georgia overall, everything that has to do with domestic demand, has huge potential," she said.

"However, as the stock market is not that developed, for bigger investors it is either Bank of Georgia and a couple of other stocks or private equity investments."

Bank of Georgia, the most liquid stock on the Georgian stock exchange and the only Georgian lender listed in London, fell 23 percent on Friday after fighting broke out in the Georgian separatist region of South Ossetia.

However, the stock regained nearly 4 percent on Monday, despite continued fighting.

"The stock is cheap but not at a distressed level yet," Kivinurm-Priisalm said.

"Should the conflict continue in Georgia, Bank of Georgia might find it difficult to refinance its loans at reasonable rates."

Kivinurm-Priisalm said the conflict between Georgia and Russia was likely to hit outflows not just from Russia and CIS capital markets, but from eastern European markets on a broader scale.

"Foreign investors have been net sellers of emerging Europe equities since 2006, but have been net buyers of bonds due to the increased carry trade," she said.

"As risk perception has increased, that might also bring along outflows from eastern European fixed income instruments."

Kivinurm-Priisalm also said a flight of capital from eastern European bonds could weaken local currencies, but that might in turn reignite investor interest.

"That will be a good thing for emerging Europe as it relieves current account deficits and increases competitiveness of export-driven companies and industrials that have suffered from strengthened currencies," she said.

The Czech, Hungarian and Polish currencies have hit record highs against the euro in recent weeks.

(Reporting by Tarmo Virki, writing by Carolyn Cohn)