Once the darling of investors, emerging markets have this year seen growth slip to lows not seen since the peak of the financial crisis and after much volatility across assets in the sector, they are not likely to return to favor any time soon.
As the U.S. is widely expected to raise interest rates for the first time in nearly a decade later this month, analysts are now trying to assess the fallout for EM, with the Bank of International Settlements (BIS) warning of further pain for the sector in 2016 that could exceed what was seen during the 2013 "taper tantrum".
Following Friday's expectation-beating jobs report, which showed the U.S. economy generated 211,000 jobs in November, markets have priced in around an 80 percent chance of a rate increase when the Federal Open Market Committee (FOMC) meets later this month.
"Weaker financial market conditions combined with an increased sensitivity to U.S. rates may heighten the risk of negative spill overs to emerging market economies (EMEs) when U.S. policy is normalized," the Switzerland-based BIS, which acts as a bank for central banks said in its quarterly review, published on Sunday.
The BIS said that changes in the yield spreads on an emerging market economy (EME) bond index compared to the U.S. 10-year Treasury note actually point to greater risks for the sector now than in 2013, when bond yields shot higher after the Fed spooked markets by hinting that a tightening of U.S. monetary policy was about to take place. Bond prices and yields move in opposite directions.
A combination of waning investor enthusiasm and cash outflows means that EM are set for their first net capital outflow in 27 years in 2015, according to the Institute for International Finance.
Johan Jooste, chief investment officer at Swiss wealth manager, Azure Wealth said while he was not always convinced by fund flow data, he said if 2013 is anything to go buy, investors should at least follow the flows.
"In terms of the flows – sometimes those reports can be a reflection of where fund managers wish they were, rather than where they are or possibly their intentions of what they might be doing late," he told CNBC.
"But what we learnt a year or two ago, certainly when the Fed was aggressive on the money side (which sparked the 2013 taper tantrum) – was go where the money goes," he added.
Weakness in emerging markets was seen perhaps more acutely in foreign exchange markets than in any other asset class as the culmination of slowing growth, a sell-off in commodities and expectations of Fed tightening fears gripped markets.
The likes of the Brazilian real, the Turkish Lira and the Colombian peso all tumbled to record lows in September.
"There have also been signs that EM local currency yields are increasingly sensitive to developments in the United States. The post-crisis era has been characterized by strong international spill overs from U.S. bond yields to emerging markets, even when those countries were at different stages of the business cycle. And this effect seems to have strengthened over time," the BIS added.