With the risk of rising U.S. interest rates receding, now is the time for investors to end their underweight positions on emerging markets, Mark Mobius, executive chairman of Templeton Emerging Markets Group, told CNBC.
Mobius said emerging market bonds particularly looked attractive as companies were still paying healthy coupon rates at a time major central bank rates have slashed interest rates below zero or are at troughs.
One of the risks that drove funds out of emerging markets -- expectations of a more hawkish U.S. Federal Reserve -- appears to be fading. On Wednesday, the Fed cut its projection for the number of interest rate hikes it expects to make this year to just two from four and projected just two hikes in 2017. That was a more dovish move than was expected.
"Over the last three years, emerging markets have been hit by the threat of Fed increases. Now you have a situation where the Fed is hesitating and maybe even will cancel the idea of rate increases," Mobius told CNBC's Capital Connection. "So you have a situation where American investors and investors globally are beginning to think, wait a minute, U.S. markets are peaking, looks like it's peaked, maybe I should start diversifying out into other areas."
Emerging markets represent around 30 percent of global equity market capitalization and gross domestic product (GDP), according to Mobius, and by that metric, if investors own less than that, they're underweight, he said, adding most investors now "are severely underweight in emerging markets."
That's borne out by the Bank of America-Merrill Lynch fund manager survey for March. It found that a net 11 percent of global fund managers are underweight emerging market equities, although that's an improvement from last month's net 23 percent underweight. Fund managers have been net underweight emerging market equities for 15 straight months, the survey found.
But there are signs the aversion is shifting. Around 26 percent of fund managers in the survey identified being short emerging markets as the most crowded trade this month.
He noted that in light of several central banks turning to negative interest rate policies, including the Bank of Japan and the European Central Bank, emerging market bonds are looking more attractive.
"Companies are doing pretty well and they're offering very high rates," he said. "If you're issuing a bond at 6, 7 or 8 percent in U.S. dollar terms, that's extremely attractive for somebody sitting in the U.S. with a negative rate."
Franklin Templeton Investments has around $714 billion under management.
Mobius isn't alone in seeing value in emerging markets.
"As long as you have a Fed that's anchored to being more dovish, that's going to tend to be more supportive to emerging markets," Greg David, head of fixed income at Vanguard, told CNBC. "We think there's value there and as long as the Fed is somewhat dovish, we think it can outperform the broader market."
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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1