After a disappointing 2013 – emerging market stocks ended the year down around 5% – the start of 2014 has been equally disappointing. The MSCI Emerging Markets index fell around 7% in January, with some individual countries in the index seeing much bigger losses.

Fund flows do not look much better – globally investors pulled a record $6.3bn out of emerging market equity funds during the final week of January alone.

However, despite the sell-off, which has been triggered by fears over China’s growth slowdown, a decline in corporate profitability and concerns over US tapering, fund managers say the emerging market investment story is firmly intact and the recent volatility has in fact presented a number of opportunities for long-term investors.

“There’s no doubt emerging markets are having to face up to some tough challenges. Fed tapering is making them realise they are in global competition for more expensive capital. Concerns over bubbles developing in the Chinese economy are feeding worries about the growth picture and emerging market companies have been slow to react to weaker economic conditions,” says Devan Kaloo, head of global emerging markets at Aberdeen Asset Management.

However, he emphasises that emerging market companies are in a stronger economic position than they have been and are well positioned to adjust to meet the current challenges.

“Emerging markets have a history of scares and what follows the latest bout of uncertainty will merely be a natural and healthy adjustment,” he says.

“Current volatility is spurring reforms both at the government and company level. Far from being the death of emerging markets, the current volatility presents opportunities to invest in good quality companies.”

Paul Rogers, manager of the Lazard Emerging Markets Core Equity fund, concedes 2014 will be a “year of transition” for emerging markets but he believes news of a crisis has been “overdone”.

“These economies are still coming out of the global financial crisis. They couldn’t implement quantitative easing in the same way the US or UK could, so it is taking them longer to consolidate,” he says.

“But with emerging markets it comes down to valuation. Emerging market valuations are trading at a historical discount and a significant discount to other asset classes. Intelligent investors should reallocate towards emerging markets.”

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says the recent sell-off acts as a reminder that emerging markets can be volatile and are only suitable for long term investors.

He says: “Sell-offs create opportunities. However sentiment towards the asset class remains negative and it could be a long while before we see a recovery.

“Timing markets can be extremely difficult and catching the bottom is almost impossible. We recommend investors focus on the long term. One way to take advantage of the volatility is to drip feed investment into emerging markets through monthly savings.”

Experts’ emerging market fund picks

Lazard Emerging Markets fund

Ayesha Akbar, portfolio manager, ISG at Fidelity Worldwide Investment says: “The fund is managed by veteran emerging markets investor James Donald, who heads a six strong equity team, dedicated to investing in this portfolio. The team can also draw on the wider resources of the Lazard emerging markets team, who manage money in different styles. The fund is constructed on a mostly bottom-up stock picking basis, and there can be significant deviations from the benchmark as a result. The team will use both qualitative and quantitative measures in deciding which stocks to invest in and economic, corporate governance and geopolitical risks are taken into account in the construction of the portfolio.”

Eaton Vance PPA Global Emerging Market Equity fund

Akbar says: “This fund provides a truly differentiated approach to investing in emerging markets. The portfolio managers invest in a wide range of countries adopting a more top down rather than a stock picking approach. This fund also provides exposure to frontier markets as well as the more traditional emerging markets as the team aims for the fund to be as fully diversified across as broad a range of countries as possible. The team has set up a systematic approach which takes advantage of the higher volatility of these markets as well as the low level of correlation between countries.”

Newton Emerging Income fund

Hargreaves Lansdown’s Adrian Lowcock says: “The philosophy of this fund managed by Sophia Whitbread is that dividend growth is tied to earnings growth. Emerging markets provide a number of high growth economies, with the potential for high earnings growth; earnings growth combined with a stable dividend rate should lead to dividend growth. The yield is 4.59%.”

JPM Emerging Markets fund

Lowcock says: “The fund is managed by Austin Forey. Rather than focusing too much on short-term economic volatility he focuses predominantly on the prospects for individual companies. He currently favours businesses selling goods to consumers, believing that as incomes rise the ’emerging consumer’ could become a good source of profits for these types of company. We believe this fund is a good choice for more adventurous investors seeking long-term exposure to higher risk emerging markets.”