“The terrible five could do pretty well because they’ll have improvements in the currencies and stock markets,” he said. “From our perspective, we’re finding the most opportunities in those economies, with the exception of South Africa.”

Investors are taking a closer look as the Washington-based Institute of International Finance predicts that private capital flows into emerging markets will fall $153 billion to $1.1 trillion in 2013 and slide another $33 billion next year.

“The basic story for EM right now is we’re going through an adjustment,” Bruce Kasman, chief economist at JPMorgan Chase, said in an Oct. 11 panel discussion at the IIF. “There were excesses that were created. It’s going to take a while to work this out, and I don’t think we should expect EM to come back to anything like we were used to.”

Behind the palpitations are slower growth in China compared with the mid-2000s and signs U.S. monetary policy may be reaching a turning point, according to Stephen King, chief economist at HSBC in London.

Low-Rate Environment

Previously, China’s double-digit expansion prompted investors to bet it would serve as a magnet for the products and commodities of other emerging markets, he said. In addition, a low-interest-rate environment in developed countries led capital to seek higher returns elsewhere, masking or even encouraging fault-lines such as widening current-account deficits, weak productivity, a small share of investment relative to domestic consumption and delays in infrastructure improvements.

“After the financial crisis, the magic asset was mostly to be found in emerging markets and money poured in,” King said during the Oct. 11 IIF panel discussion. It was “often with no regard to whether the underlying quality of growth in the emerging-market world was necessarily particularly good.”

A “return to reality” now is setting in, said Erik Nielsen, global chief economist at UniCredit SpA in London. The key concern with the BIITS is related to their “reliance on short-term foreign financing, particularly as global trade grows very slowly and we are moving towards some sort of monetary normalization.”

Brazil Slump

Brazil has suffered a slump in the real after relying on credit-led consumption, which failed to boost productivity and returned the country’s current account to a deficit of about 3 percent of gross domestic product.