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LONDON (Reuters) - Emerging markets may well appear cheap again after years of attrition, but there's considerable trepidation about venturing back out to the developing world until the financial and political storms have finally lifted.
Global investors have tiptoed back into emerging assets over the past six weeks at least partly on hopes that the gut-wrenching New Year shakeout may have been a final capitulation after three years of downdrafts and disappointments.
According to the Institute for International Finance, foreigners ploughed some $36.8 billion back into emerging stocks and bonds in March - the highest inflow in nearly two years and well above monthly averages of the past four years.
And yet these are baby steps. To put it in context, that portfolio pop compares with a total net capital outflow from emerging economies in 2015 of some $730 billion.
For the coast to clear, three clouds have to evaporate.
First is a lingering fear of higher U.S. interest rates and dollar appreciation that squeezes hard-currency borrowers in emerging economies, stresses local currencies and forces credit to be far tighter than needed to buoy weakening economies.
The second is China's economic slowdown and its slipstream effect on commodity prices and emerging markets at large.
And third is a spike in political risks in many countries such as Brazil, Turkey and South Africa - pressures magnified by recessions and rising joblessless but which, in turn, compound the economic malaise and policy paralysis on the ground.
Neither of the first two global issues have been resolved.
The world markets fillip of the past month has been rooted in the U.S. Federal Reserve's hesitation in adding to December's first interest rate rise in almost a decade and the resultant dollar recoil.
But rekindled Fed hawkishness as the quarter ends puts a potential relapse on the dashboard - particularly if the rebound in emerging assets is little more than a re-balancing of portfolios from extreme aversion and if you believe that cycles of dollar appreciation historically last far longer than this.
JPMorgan strategists remain optimistic about emerging markets outperforming over the next three months - not least because funds are starved of income in developed economies. But they acknowledge that there's no outright improvement in the economic picture and that price moves are built solely on re-positioning.
"Given the almost five years of emerging markets equity and FX underperformance - and recent conversations with investors - it could take at least a few months before the average investor is again neutral," they told clients.
So the move may have some legs, but it's highly vulnerable if the global climate turns inclement again.
For a start, JPMorgan's rosier view hinges somewhat on the fading of 'China tail risk' involving messy yuan devaluation.
And while Beijing has been forceful on the issue, few investors can muster much conviction about China's markets.
Christophe Donay, head of asset allocation at Swiss firm Pictet's Wealth Management unit, said that China may hold the line for now but that there was a high risk over the next three years of a 'Minsky moment' - a sudden collapse of asset prices due to credit and currency pressure named after economist Hyman Minsky.
"We are staying well away from emerging market assets because of that and hold very limited EM exposure," he said.
With such scepticism about the international environment, the return to markets riven by a host of disparate but highly disruptive domestic political risks seems brave at least.
Mired in a deep recession, Brazil's political strife has yet to reach a crescendo. Dilma Rousseff is struggling to save her presidency and fighting an impeachment process amid a widening graft investigation into state oil firm Petrobras.
While markets have rallied on the prospect of a new government, it could still take several more weeks or even months for a clear outcome.
Turkey's economy and government too are under strain given the war in neighboring Syria, the resultant refugee crisis, internal conflict with Kurdish separatists, a clampdown on local media and a diplomatic showdown with Russia.
The struggling South African economy and its buckling infrastructure are compounded by pressure on President Jacob Zuma, his finance minister Pravin Gordhan and the ruling African National Congress amid a variety of accusations and probes about undue political interference and graft.
More authoritarian governments in China and Russia may seem less vulnerable than their democratic counterparts, but slowdown and recession heighten the political risks there, too. An oil hit and foreign sanctions continue to hamper oversees refinancing by Moscow and its major companies.
While the picture in Brazil may mask a brighter hue in Mexico or the slowdown in China hide the resilience in India, a still sizeable slice of the emerging universe remains in foment.
China, Brazil, Russia, South Africa and Turkey together make up more than 42 percent of the market capitalization of MSCI's benchmark emerging market equities index.
Asset manager Blackrock's sovereign risk indices measuring the likelihood of defaults across the world contain a political risk sub-set called 'willingness to pay'. This remained the biggest negative for the countries recording the biggest overall index declines in 2015 - Brazil, Russia, Peru and Colombia.
"Politics and institutional capabilities will play a big role in EM going forward," said Kamakshya Trivedi, Goldman Sachs managing director for emerging market research. "Those factors become more important in a world of sluggish growth and tightening credit, they are easier to overlook when growth is accelerating and credit is plentiful."
Additional reporting by Sujata Rao; Graphics by Vincent Flasseur; Editing by Hugh Lawson