Emerging markets are also getting a boost from recent U.S. dollar moves, which are making their currencies more competitive, it said. The trade-weighted inflation-adjusted U.S. dollar rose 33 percent from its mid-2011 lows through earlier this year, with signs emerging now that the greenback may be stabilizing, BofA said.
Sharp weakening in emerging market currencies typically spurs a reining in of excesses and cutbacks on mal-investment, with the process now "quite advanced" in most countries, it said.
"Competitive currencies make assets in these countries more attractive, and generally help their profit margins by making their exports more desirable," it said, adding that around 40 percent of emerging-market currencies are in their most competitive zone against the dollar.
Another reason BofA is turning bullish on the segment is that capital expenditure is declining, which it sees as an indicator of higher earnings margins ahead.
"As strategists, we normally recoil when we see too much investment. A lot of it is often simply mal-investment, financed by cheap, mispriced capital and uncontrolled animal spirits," BofA said. "For now, we can see that the capex binge in Asia is reversing itself (mainly India, Korea, Taiwan and China but not in Southeast Asia). Likewise, in Latin America and more mixed in EEMEA [Eastern Europe, Middle East and Africa]."
That means margins should begin to rise in Asia and emerging markets, especially when compared with the U.S. and Japan, it said.
BofA also expects tailwinds from reforms of state-owned enterprises (SOE) across emerging markets, where they account for around 50 percent of market capitalization.