Emerging market equities have taken quite a beating in the last couple of months on fears of the U.S. withdrawing its monetary stimulus, but Citi says investors are too bearish on the asset class, and they're predicting a big turnaround.
The bank's bullish outlook calls for a nearly 27 percent upside to the MSCI Emerging Markets Index in the next 12 months to 1150 from the 907 level on Monday.
"Our main reasons for optimism: consensus is too bearish/underweight emerging markets, liquidity is ample, economic surprises are improving, earnings are outperforming developed markets, and valuations look cheap," Citi said in a note.
Citi's index target is based on one year forward price to earnings (P/E) ratio of 12.4 versus the post 1995 average of 15.
"On price to book value, this equates to an exit multiple of 1.7 times, a 10 percent discount to the historic mean," Citi said.
The MSCI Emerging Markets Index is down almost 13 percent since late May when U.S. Federal Reserve Chairman Ben Bernanke failed to provide a clear picture on the continuation of its monthly $85 billion bond buying program, sparking fears of tapering.
(Read More: Emerging Markets Allocations Lowest Since 2008)
Emerging market currencies, equities and bonds have benefitted from the Fed's loose monetary policy, which has pumped extra liquidity into the region's financial markets.