A sell-off precipitated by global recession fears and the deepening eurozone debt crisis has resurrected the spectre of capital flight, a threat that still haunts emerging markets for all their vaunted strengths.
Three years after the collapse of Wall Street giant Lehman Bros sparked a stampede out of higher risk assets and sent emerging economies reliant on foreign funding into shock, such fears have resurfaced in recent days amid heavy emerging equity and bond losses accompanied by sharp currency weakness.
Persistent hopes that developing economies can defy a Western downturn are set to be dashed the second time in four years, once again threatening to wrong foot investors who have bet big on the resilience of these markets.
"The process has just begun as real money investors haven't yet exited. All the ingredients are in place for a similar crisis to occur. The question is what magnitude," said Benoit Anne, head global emerging markets strategy at Societe Generale.
Since Aug 1, emerging stocks have tumbled 22 percent to underperform world markets , down 15 percent. Sovereign hard-currency bonds are at their weakest in over two years while local-currency debt year-to-date returns have turned negative in dollar terms.
Evoking memories of 2008 when investors offloaded emerging assets for more liquid securities such as US Treasuries, this latest wave of foreign-led selling has been especially punishing on recent market darlings Indonesia, South Korea and Russia.
In the last seven weeks, the Korean won has skidded 12 percent lower while Russia's rouble has dropped 13 percent versus its dollar-euro basket. Brazil has lost 14 percent of its value against the dollar this month, chalking up its biggest one-day falls since October 2008.
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