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Emerging market rout fueling riskier Asia bets: Citi

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The emerging market rout is hiding funds' fickle switch into riskier sectors as the infatuation with emerging Asia's rising middle class and its consumption story fades, Citigroup said.

While current-account deficit countries, such as India and Indonesia, have been hit the hardest, the rout is really about investors preparing for better growth ahead, according to the bank.

Until now, "investors have liked current account deficits as they signal excessive consumption over savings," the bank said in a report.

(Read more: Emerging markets: dissecting the good from bad)

"Within emerging markets, the belief was that a dollar of earnings from the Philippines, Thailand, etc., was better than a dollar of earnings out of Korea or China. What was better about those earnings than those out of the likes of Korea or China is that they were domestic – and domestic earnings are more resilient – i.e. better – than those generated by foreign, read global, means," it said, calling the end of the domestic demand theme.

Indeed, performance of individual Asian markets during the rout has matched Citigroup's theme, as those associated with export growth outperformed.

(Read more: Is a 'flash flood' back into emerging markets next?)

So far in August, Indonesian shares are down more than 13 percent and Indian stocks are off more than five percent, but Korean shares are off less than two percent, Taiwan shares have shed 3.5 percent and China's Shanghai Composite is up around five percent.

"The markets are telling us that the world is getting better, and so growth sensitivity is a good thing," it said. "Economically sensitive stocks in Asia are continuing to move higher and are taking the prospects of tapering by the Fed as a sign of better global growth," the report said. Over the past month, emerging market stocks with riskier attributes are up 3.9 percent, while stocks viewed as higher quality are down 0.9 percent, it noted.

Among the stocks Citigroup tips as cheap risk plays are Tata Steel, China Railway Group, Chongqing Rural Commercial Bank and Sino-Ocean Land, while it views previously hyped consumer plays such as Jollibee Foods, Hindustan Unilver and Tencent, as expensive.

(Read more: This isn't 1997-98 — but could it be worse?)

To be sure, Citigroup's view may be in the minority. Kevin Scully, executive chairman at NRA Capital, disagrees that the consumer story has played out.

He believes the markets are just reacting to an expectation the U.S. dollar will strengthen as the Federal Reserve winds down quantitative easing.

"There is a switch into dollar assets," he said. "If you stay in Asia, then you will suffer from further currency weakness." He believes equity risk premiums – or the extra return investors demand over the so-called risk-free rates as compensation for taking on risk – are readjusting higher to expectations U.S. Treasury yields will rise significantly.

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