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New York - The threat of less central bank stimulus and higher interest rates has crushed emerging markets more than most assets in the past two months, in some cases slashing the value of stocks and bonds in developing countries to levels not seen since the last financial crisis.
The slump after US Federal Reserve chairman Ben Bernanke signaled in May that the Fed expects to curb and then end its bond-buying program in the next year if the economy improves, has pushed prices to levels that would have looked very appealing only a few weeks ago.
Some emerging market investors are buying, even with the understanding that there is a big risk markets have further to drop.
"We are starting to selectively increase our exposure to emerging markets," said Andres Calderon, portfolio manager and vice president for research at Hansberger Global Investors in Fort Lauderdale, Florida. "But the key word is selective. We' are not rushing in."
There is every reason to be cautious: Many fund managers expect lower growth in emerging markets. Some markets have suffered recently from steep capital outflows, and the slowdown in China has affected other emerging economies, particularly commodity producers.
Still, emerging markets are expected to continue to grow faster than developed countries.
Northern Trust Asset Management, for one, has remained overweight in emerging market stocks through the slide. The Chicago-based firm manages $810bn in assets.
"If you're worried about performance in the next one or two quarters, then it's hard to make a case about a visible catalyst for emerging markets," said Jim McDonald, Northern Trust's chief investment strategist. "But if you have a 12- to 18-month outlook, then this group will work."
He said emerging-market stocks are trading at around 10 times this year's earnings, or a 32% discount relative to the Standard & Poor's 500-stock index. The asset class's historic low is about eight times earnings.
Emerging markets have typically traded at a 20% discount to the S&P 500 since 2005.
The price-to-book ratio of emerging market stocks on the MSCI stock index is also showing sharp undervaluation at 1.45, not far from the low of 1.36 hit during the depths of the financial crisis, according to Morgan Stanley data.
That is still far higher than the 0.93 reached during the Asian crisis of 1997/'98. The price-to-book multiple measures the company's value if it goes bankrupt.
"I wouldn't be surprised, though, if EM stocks come down further because there would still be continued outflows from the sector," said Calderon of Hansberger, which is a long-term investor in emerging market equities, with assets of around $6.2bn.
There is plenty of wreckage to survey for possible bargains.
The benchmark MSCI emerging market stock index is down about 11.3% this year, with much of the decline coming in the past six weeks. By contrast, the MSCI's all-country world equity index is still up 4.8% this year, while the S&P 500 sports a sizable 12.8% gain for 2013.
In the debt market, the emerging market bond yield spread on dollar-denominated bonds, a gauge of perceived risk over safe-haven US. Treasuries, was at 342 basis points on Thursday on the benchmark JP Morgan Emerging Markets USD Bond Index (EMBI+) . On Tuesday, the spread was its widest in more than a year.
This index has fallen about 6% in June and is down more than 10.7% this year, after gains of more than 18% in 2012.
