* Consensus "sell" on emerging markets starts to break up
* Barclays, HSBC, Citi, Societe Generale flag value
* Fund managers more cautious in spite of profit potential
* $100 bln exited EM equity funds over 12 months -Morgan Stanley
By Simon Jessop and Sujata Rao
LONDON, April 1 (Reuters) - Investors are starting to look afresh at emerging equities after years in which the sector has been a consensus "sell".
Barclays, Citi, HSBC, Morgan Stanley and Societe Generale are among banks now advising clients to buy back in - albeit selectively - after a prolonged sell-off that has slashed valuations.
"The timing of that decision will determine people's performance (for the year)," said Fredrik Nerbrand, global head of asset allocation at HSBC, who has a 40 percent portfolio exposure to EM-related assets through hard and local currency debt, commodities and equities.
"When I talk to investors, most people agree with us on a valuation basis, but are concerned about the headline risks that still persist in some emerging markets."
Since June 2013, the first full month after U.S. Federal Reserve chairman Ben Bernanke flagged plans to cut its massive monetary stimulus efforts, fund flows out of the broad swathe of countries collectively known as emerging markets have been huge.
Worries about the impact of U.S. monetary tightening and a prospective economic slowdown in China have been joined recently by political tensions over Ukraine and in Turkey.
While those with a need to invest in EM focused on picking winners - often, countries with a current account surplus - or upped their cash holdings for a period, those with a broader investment brief quit the sector in droves.
Outflows from emerging equity funds have totalled $100 billion in the past 12 months, or almost a tenth of assets under management, according to Morgan Stanley analysts, who base their calculations on EPFR Global data.
A record 31 percent of investors are currently underweight emerging stocks, according to Bank of America Merrill Lynch's latest monthly poll of funds with $509 billion under management.
By all accounts, most of this cash returned home to Europe and the United States. But after 22 weeks of outflows, losses have slowed to a trickle.
"The view in the market has been generally bearish, particularly since Ben Bernanke spoke about tapering. A lot of funds were badly hurt by that," said Societe Generale cross-asset strategist Ahmed Behdenna.
His bank, bearish on emerging stocks for the past three years, is now advising clients to buy, going from zero-weight to underweight. So while it still recommends holding fewer emerging equities compared to their share in the index, Societe Generale until recently advised having no exposure at all.
The change in stance has been driven by low valuations, how geared Asian countries are to the recovering U.S. and European economies, and recent robust action by EM central banks to defend their currencies, Behdenna said.
Currencies such as the Indian rupee and Brazilian real have rallied around 10 percent off lows hit last year.
"We have seen a lot of outflows and so valuations are at very low levels, especially compared to developed markets such as the United States," he added.
Here's how cheap the market is: stocks in MSCI's emerging index trade at an average 10 times predicted earnings while developed equities trade at almost 15 times. On a book-value basis, emerging stocks are valued at 1.3 times versus almost 2 times for their richer peers, as the following graphic shows:
Emerging equities have a lot of catching up to do. Since end-2010 MSCI's emerging index has lost 13 percent while the U.S. S&P 500 has gained almost 50 percent.
Even since Bernanke's May 2013 speech, Wall Street is up around 10 percent while emerging markets have shed more than 6 percent.
That masks some serious divergences, however: China's CSI300 index is 17 percent lower and Indonesia and Brazil down 9-12 percent, while India is up 10 percent.
Headwinds still blow in the form of slower growth, upcoming elections and fears over China's debt mountain, says Jonathan Bell, CIO of Stanhope Capital, which runs $8.5 billion on behalf of wealthy families and charities.
Bell is capping emerging markets exposure to 20 percent of his total equity position. Yet he reckons investors should now consider reducing exposure to "overvalued" markets such as the United States in favour of Asia.
"The market is already expecting bad news in these markets. If the news is bad, it's probably already in the price, and if it's good it could give a bit of a boost. Combined with the valuations, to our mind makes them compelling," he added.
ING Investment Management, which has $238 billion under management, last week changed its position on emerging stocks to neutral from underweight.
"We keep our negative strategic stance but feel that given how well the markets have digested the bad news of the past months, there is a good chance EM currencies continue to rally," ING IM's investment strategist, Maarten-Jan Bakkum, said.
"That is always good for EM equities." (Additional reporting by Vikram Subhedar; Graphic by Vincent Flasseur; Editing by Catherine Evans)