Emerging Markets Could Snap Back, If Fed Cooperates
Emerging markets may have taken a vicious battering on fears the Federal Reserve may soon remove the easy money punch bowl, but a turnaround in sentiment could be equally dramatic should the U.S. central bank move to soothe some of the jitters this week.
According to Ed Dempsey, founder and chief investment officer of New York-based investment adviserPension Partners, these assets are set for a strong comeback if Fed Chairman Ben Bernanke surprises markets by indicating continued stimulus.
(Read More: Here's What Is Benefiting From Fed Tapering Fears)
"You could get a very large oversold rally [in emerging markets] if you get a favorable outcome [from the Fed]," said Dempsey.
Worries over the potential tapering of the Fed's $85 billion a month quantitative easing program have prompted a worldwide sell-off in recent weeks, with emerging markets experiencing a particularly ugly correction.
The MSCI Emerging Markets index is down almost 10 percent this year, in stark contrast to the S&P 500's near 17 percent gain. EM currencies have taken a battering as well, with certain ones – such as the South African rand and the Indonesian rupiah – suffering particularly steep losses.
Investors are now hotly anticipating the outcome of the two-day Federal Open Markets Committee meeting on Wednesday when Bernanke is expected to unveil his next move.
(Read More: Emerging Market Funds See Biggest Exodus Since 2011)
"The action of the emerging markets has been telling you the market is pricing in a much broader reduction in stimulus… [but] if you had stimulus along with some economic growth that would trigger a big emerging markets rally in the months ahead," said Dempsey.
There has been increased speculation the Fed will signal reducing its QE program; U.S. markets swooned briefly on Monday after a report in the Financial Times suggested that tapering could start in several months. Still, Dempsey believes it's more likely Bernanke could continue down the stimulus path.
"The wealth affect is so important in the U.S., the Fed has worked for it for three years they are not about to see the markets undo all the good work it has done. This is why we are all hanging on their every word as they may take out additional insurance – it's very possible," he added.
Long Term Outlook for EM Intact
Tai Hui, chief Asia Pacific strategist for J.P. Morgan Funds, argues that whatever the outcome of the FOMC meeting, the future of emerging markets remains attractive.
(Read More: Why Emerging Markets Are Still on Shaky Ground)
"Investors need to be prepared for more volatility ahead given that we are still working out what the Fed is going to do exactly, but if you look at the fundamentals, a lot of the news flow and a lot of the problems facing emerging markets are overstated," said Tai Hui, chief Asia Pacific strategist for J.P. Morgan Funds.
"There are a lot of structural stories that are ongoing and that's why I think emerging markets are still good value for investment," he added.
—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie