(Bloomberg). — Some intrepid investors are starting to see the $5 trillion collapse in emerging market economies as a buy opportunity. 

These are the obvious pain points: Stocks fell below their average values over the last 17 years. Local-currency bond yields have soared through a range that’s held since the 2008 crisis. Spreads on dollars bonds have risen to levels that are only seen in times of crisis. 

Emerging markets now have a better understanding of how to price the risks after 15 months’ capital outflows. For some money managers, that means it’s time to start buying again — not in a bullish outburst, but in gradual, cautious steps. Still, the risk of deeper losses remains, especially if China’s economy slows further or the Federal Reserve turns more hawkish.

“We have reduced our bearishness on the emerging-market asset class,” said Paul Greer, a money manager at Fidelity International in London. “While fundamentals remain very challenged, the valuations on offer, coupled with a more favorable technical picture, have meaningfully altered the near-term risk-reward asymmetry.”

MSCI Inc. estimates that the equity value of all 24 emerging market nations has dropped $4 trillion from a peak of early 2021. Bloomberg’s gauges of local currency debt and dollar bonds have fallen $500 billion, respectively, since their highest point. Investors are most concerned about Fed rate increases and quantitative tightening. However, rising inflation and new pandemics in China as well as the conflict in Ukraine play an important role.

The selloff pushed a JPMorgan Chase & Co. (NYSE:) measure of the extra yield investors demand to own emerging-market sovereign dollar bonds over Treasuries to 489 basis points on Friday. That’s a whisker away from the 500 basis-point mark that triggered a turnaround in 2015, and above the level that sparked one in 2011.

“It’s reasonable to expect the panic selling to be behind us,” said Jennifer Kusuma, a senior rates strategist with a focus on Asia at Australia & New Zealand Banking Group (OTC:). “The market provides decent entry levels for tactical positioning or for long-term investors who are less affected by market volatility.”

The flashing signs of low prices are also being displayed by local-currency bond. The average yield for the EM Local Currency Government Universal Index rose to about 4.94%. It is above its downward sloping range since 2008. 

“Yields are now sufficiently attractive at cyclical highs,” said Leonard Kwan, a fixed-income portfolio manager at T. Rowe Price Group in Hong Kong. “They are better able to cushion against a further rise in core rates and still provide positive returns over the next year.”

Meanwhile, MSCI’s equity benchmark for emerging markets has fallen every month this year, extending its 2021 declines. The price-to-book, which compares stock prices to their balance sheets and not to profit-and loss accounts, dropped to 1.41 earlier in the month. This is below its 1.47 average from 2005. On Monday, the gauge was at 1.48.

All these indicators don’t necessarily mean emerging markets are ripe for a turnaround. A collapse in U.S. financial markets would almost certainly bring down the developing worlds, along with any increases in monetary tightening. Most investors believe that the bottom will be reached in emerging markets even if there are no such shocks.

“I am still bearish on local bonds despite the significant improvement in value this year,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management in Geneva. “My concern is that this cycle of developed-market central-bank tightening is much more aggressive than what investors were used to in the past 20-30 years.”

Meantime, Marcelo Assalin, the London-based head of emerging markets debt at William Blair Investment Management in London, said he’s recently added some of the world’s riskiest bonds — including debt from El Salvador, Pakistan and Argentina. The worst is over for the J.P. Morgan index of sovereign dollar bonds, he said, as it’s declined almost 17% since the start of the year. 

“The fundamental backdrop in EM is solid,” Assalin said. “I’d like to go back to that idea that emerging market crises are created by a currency crisis or a financial crisis, and I don’t see that to suggest we’re heading into the next one.”

Two cues that traders are waiting for before dipping back into emerging markets are a peak in inflation and a halt to the dollar’s rally. After six weeks of gains the greenback suffered a small loss last week. This should be encouraging. They’ll also be looking for consumer-price data this week from at least eight developing nations including Mexico and Malaysia. The Fed will use data from the US, such as consumer-consumption spending to provide clues.

“We are neutral with a view to get bullish toward the end of this year as we pass the peak in inflation,” said Edwin Gutierrez, the head of emerging-market sovereign debt at abrdn plc in London. “There’s a high likelihood market focus will turn to recession worries in the US. That will also mean emerging-market bond yields will start to fall.”

The following are the most important things you should be paying attention to in emerging markets during the week ahead 

• Russian traders are now watching the money flowing from Russia as it begins to pay holders of two foreign currency bonds. The payments will take place before restrictions on key trades expire next week.
• Turkey’s central banks and Nigeria’s central banks are expected to disregard rising inflationary pressures, and keep interest rates the same.
• Indonesia’s central bank is also expected to hold its key rate, though some economists are calling for a rate hike. Rate increases by Asian central banks, from India to Malaysia this month have been surprising
• Market participants in Brazil will have another piece to the economic puzzle before the June monetary policies meeting when the inflation print of mid-May is published
• Mexico’s inflation is forecast to rise to 5% in the first two weeks of May, which will be above the target. Base effects, however, are likely to slow the growth.
• China will likely report that industrial profits in April fell from last year, as a result of a fall in production

Updates starting at 13th paragraph with comments from investors

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