Mohamed El-Erian says we are seeing a “classic overshoot” to the downside in emerging markets right now, which should lead to more pain in the near term but opportunity over the longer term.

“What we’re seeing is a classic overshoot that starts in the emerging markets world and it starts spreading,” he told CNBC, saying the process starts with EM currency devaluations and spreads down the line all the way to US equities. “What that causes is heightened risk aversion.” He says that, while he expects things to get worse in the short term, opportunities should be created. For example, he says all emerging market investments seem to be getting treated the same right now, when some are much better off than others. He also says a key issue is whether the market loses confidence in central bank policymakers. “Prices are up here for risk assets, fundamentals are down here and the difference is enormous trust in central banks,” he said. “Markets view central banks as their best friends. So if that paradigm is shaken—if it turns out central banks do not have as much ammunition—then yes, we are going to see valuations come down to fundamentals.”