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Are emerging markets facing an ‘abyss’?

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The prognosis for emerging markets is not looking good after four straight days of heavy selling in stocks and sharp currency falls that have prompted Turkey and India to step in with supportive steps.

While the volatility, driven by concerns about an unwinding of U.S. monetary stimulus, may not be over yet, nor is it time to hit the emerging-markets panic-button, strategists say.

(Read more: Fed message to markets: Don't fear the taper)

Indeed, markets were slightly calmer on Wednesday with the MSCI emerging markets index down just 0.1 percent and off six-week lows hit the previous day.

The Indian rupee was at 63.31 per dollar, about 1.25 percent above Tuesday's record low, while the Indonesian rupiah pulled back a touch from a four-year trough against the dollar and the Brazilian real held above more than four-year lows hit on Monday.

"Emerging market currencies will sell off further, especially ones that have compromised balance of payments," said Stuart Oakley, managing director for Asian currency trading at Nomura.

"But don't expect these currencies to fall into an abyss, simply because there's still so much money and assets under management among some of the big to medium-sized long-term pension funds, and their allocation to emerging markets is still quite small."

(Read more: Brutality scorecard: Which emerging stocks have it the worst?)

According to money manager BlackRock, emerging markets account for roughly 51 percent of the world's gross domestic product (GDP), but market capitalization represented by emerging markets is just over 10 percent, suggesting the fall-out from the market rout could be limited.

"I don't think the sell-off has become disorderly in the way that it was during [the] 1997-1998 [Asian financial crisis]," Nizam Idris, head of fixed income and currency strategy at Macquarie Bank in Singapore told CNBC Asia's "Squawk Box" on Wednesday.


"I think liquidity is still there. The price action is for a higher dollar versus emerging market currencies, but we are still not in crisis mode or panic mode," he added.

Emerging markets, which benefited from massive U.S. monetary stimulus in the wake of the global financial crisis, have come under heavy selling pressure since May as investors started to anticipate a scaling back of the Federal Reserve's asset purchase program.

Countries which run big current account deficits such as India and Indonesia in particular have borne the brunt of the selling. India's stock market, for instance, is down about 10 percent since May.

(Read more: Why this unloved market is due for a bounce)

Still, strategists say there is growing attention on the opportunities to be made from knocked-down emerging market assets.

"We need to get a grip a little bit," Bill Maldonado, HSBC global asset management CIO for Asia-Pacific, said on CNBC, talking about the rout in emerging markets.

"The volatility is gut-wrenching at times and it's very difficult to stomach that, so naturally there is some caution. But there's very much an anticipation of saying, there's some fantastic opportunities here, too," he added.

— By CNBC.com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC

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EEM
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USD/INR
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USD/IDR
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USD/BRL
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MQG
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=USD
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HSFC'B
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