Emerging markets (EM) have been in rollercoaster mode since early summer, rocked by their vulnerability to a strengthening dollar and rising interest rates.
Assets across Latin America and Asia have been sold off, hit by the contagion effects from currencies in crisis like Turkey's lira.
The turmoil has left investors uncertain over whether to pounce on currently low valuations or run for the hills. How to best maneuver in this environment depends on what type of investor you are, J.P. Morgan's Nicolas Aguzin told CNBC's "Squawk Box Europe" on Wednesday.
If you're a long-term, strategic investor, it's worth holding out for emerging market returns, because fundamentals are positive, he said — but added that valuations could still fall further, due to market sentiment and the perception of trouble rather than anything else.
"Most of our time we spend thinking about long-term investments and over many cycles, not just one or two years," said Aguzin, who serves as chairman and CEO of J.P. Morgan Asia Pacific. "The strategic investors, they seem to be very interested in emerging markets especially where we're talking about India, about China. So there's a bit of a divergence from what the strategic investors are looking at and what some of the short-term investors are looking at."
The Indian rupee hit a record low this week at 72.84 to the U.S. dollar, with Indonesia and Thailand's currencies also taking a hit along with the rest of Asia, in part due to the impact of America's burgeoning trade war with China. Turkey's lira tanked to record lows in August over Ankara's reluctance to raise interest rates in an overheating economy and a diplomatic row with the U.S., sending shockwaves across emerging markets. Meanwhile, major Latin American markets Brazil and Argentina are facing turmoil of their own.
Emerging market gross domestic product (GDP) growth fell to 4.1 percent in August from 4.3 percent in July, the lowest since April 2016, according to estimates from the Institute of International Finance. And the MSCI emerging markets index has fallen more than 11 percent year-to-date.
"Investors are pulling away whether it's debt or equity markets, and that's causing some of the decreases we're seeing in emerging market indices," Aguzin said. "The reality is, when we look at some of the underlying facts, they're strong. The issues around trade are causing investor sentiment to be moving around."
Add that to the issue of rising interest rates from the U.S. Federal Reserve, making emerging market dollar debt more expensive to pay off, and the current picture looks more grim. "That's what I'm most concerned about," he added. "I'm more concerned about the expectations and how to manage expectations.
"The concern is as this starts to permeate into expectations, it could cause some issues in the medium term. Other than that, all the indicators seem to be fairly strong."
But for the time being, low valuations may not be enough to guarantee a safe investment in the near term, because of the power of sentiment on markets. The Donald Trump administration's decision to impose fresh tariffs on an additional $200 billion worth of Chinese goods and China's promise of retaliation, escalating the trade war between the world's two largest economies, paints a worrying picture for emerging markets ahead.
"It's not going to be just valuation — when momentum is playing against the market, and sentiment is negative, those prices could continue to fall. I don't think it's enough in terms of just seeing a few indicators around valuations and saying this is getting to an attractive level," the CEO said.
Still, valuations in China and India, in particular, are looking like an attractive entry point to longer-term investors. But emerging markets more broadly are looking at around six to 12 more months of pressure, according to Nordic bank SEB.
"EM currencies look oversold in the near term," Per Hammarlund, chief emerging markets strategist at SEB Bank, wrote in an email note Tuesday. "While we expect EM to be relatively stable and perhaps even to recover slightly in the coming few weeks, the poor underlying macro picture, and falling commodity prices, in combination with coming U.S. Fed hikes, imply that EM assets will remain under pressure over the next six to 12 months."