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Is the emerging market rally a flash in the pan?

Frank van den Bergh | E+ | Getty Images

Emerging markets are shaking off last year's rout, but it isn't clear if the rally has staying power or if it's just a flash in the pan.

"Investors were overly negative on emerging markets and it was a crowded short," Citigroup said in a note Monday. "Some of those shorts have now been unwound."

It isn't clear if those trades will stay unwound.

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"It remains fashionable to be bearish on emerging markets," Citigroup said. "Less than a few weeks ago, the questions were still all about an emerging market blow up, banking crisis, currency collapse, and earnings disappointments. Now that emerging markets [have] rallied off the lows, the perception is that it is clearly not sustainable."

Over the past two weeks, emerging market bond funds saw $2.85 billion worth of inflows while around $4.80 billion has flowed into emerging market stock funds over the past three weeks, although the two segments have still seen net outflows of $9.33 billion and $25.55 billion respectively so far this year, according to data from Jefferies.

In 2013, $14.1 billion exited emerging market equity funds, while $14.04 billion said good-bye to the segment's bond funds, according to data from Barclays.

Read MoreHas the emerging market buying moment arrived?

The segment faced a brutal sell-off last year and earlier this year after sharp falls in the value of the Argentine peso, Turkish lira, South African rand and Brazilian real triggered panic selling across the asset class, with analysts largely blaming the turbulence on the Federal Reserve's move to begin tapering its asset purchases.

But Citigroup believes investors have been too negative on emerging markets, noting that the segment's earnings forecast revisions are no longer worse than the developed market counterparts'. In addition, emerging markets still appear cheap compared with historical levels and developed markets, Citigroup noted.

"That should continue to lend support to those wishing to allocate more toward emerging markets," Citigroup said.

But it added, for the rally to continue, the earnings environment will need to remain supportive.

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Export momentum will also need to continue improving, it said.

"Better exports means better earnings and better earnings means greater willingness on the part of investors to become buyers of equities," it said.

For its part, JPMorgan expects the short-covering can continue.

"Investors appear to have been covering shorts on emerging market bond ETFs (exchange-traded funds) almost uninterrupted since last August," it said in a note Friday, citing the value of the ETFs on loan as an indicator of "fast-money" investors' appetite for short selling.

Others aren't certain whether emerging markets are really all that cheap.

Read More Are EM companies the real debt worry?

While the cheap names in emerging markets are "very cheap and unloved," the growth stocks are trading at high price-to-book levels, Bank of America Merrill Lynch said in a note Monday.

"If indeed we have seen the peak in growth stock multiples, the declines are not done yet," BofA said, adding valuations could contract another 30 percent.

It believes that emerging market growth stocks, especially in the consumer, tech and healthcare sectors, have benefited from the Federal Reserve's quantitative easing measures, which have kept the cost of equity low. As the Fed tapers, "that source of sustenance and mojo is going to be gone soon."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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