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Emerging markets have already taken a severe battering over the past couple of months due to heightened concerns about the crisis gripping the US financial sector - and investors should expect even more bad news over the coming months.

This is the depressing verdict of fixed income managers specialising in emerging market debt, who have watched the value of their portfolios shrink despite a series of moves by the US authorities to calm market jitters.

According to Richard House, a portfolio manager at Threadneedle, emerging markets have been hit by the double whammy of slower economic growth and significant outflows from equity and bond funds.

Billions of dollars have been taken out of these markets due to panic selling and the forced closure of many hedge funds. Weaker commodity prices and the prospect of tougher times have also added to the general feeling of gloom.

“There have been unprecedented redemptions over the past few months as it is often hedge funds that have allocations to emerging markets,” he explains. “At times like these it is not about the fundamental stories. It is about getting your money back.”

Gordon Brown, joint manager of the Baillie Gifford Emerging Markets Bond fund, believes the only way to play this theme is via markets where the sell-off is thought to have been completely unjustified.

“The recent moves have been pretty brutal as the financial market turmoil that started in developed markets has spread pretty quickly to the emerging world,” he says. “To a large extent the sell-off has been indiscriminate.”

As a result, not only have countries with funding difficulties and current account deficits – such as South Africa, Hungary and Turkey – had problems, but so too have the likes of Brazil, Mexico and the Czech Republic.

“In these countries the underperformance has less to do with the fundamentals being horrible – although they are clearly deteriorating – and more to do with equity and bond investors fleeing in large numbers,” he adds.

Brazil, for example, has been a popular play on the commodities theme until recently, and may still have a lot to offer. “Most of its growth story has centred on domestic consumption, which means it is better insulated from global economic weakness than countries dependent on exports,” explains Mr Brown. “It does not have current account issues, its fiscal position is pretty solid and inflation is under control.”

The Czech Republic, meanwhile, is geared to European growth. “It is trying to cut rates to stimulate demand and weaken its currency to give exports a boost,” he adds. “We would class those as two solid fundamentals.”

Threadneedle’s Richard House believes a key factor is getting the split right between sovereign and corporate debt. The former, he insists, is looking far stronger because many names in the latter have failed to pay down debt to any great degree.

“Sovereign external debt offers a significant amount of value because the risk of default in any of the big headline countries is very low, as there has been a massive improvement in the balance sheets of emerging markets,” he explains. “Over the past five or 10 years they have been building up a massive stockpile of foreign exchange reserves and paying down debt, which has put them in a stronger position.”

In contrast, Mr House cannot see any compelling reasons to buy corporate debt, citing lack of liquidity and over-supply. It is a position he expects to maintain for the foreseeable future.

“We also prefer sovereign debt in Latin America to eastern Europe because the latter has gone on a borrowing binge and governments may have to bail out the private sector,” he adds. “If they do then debt levels will rise.”

Meanwhile, Andrew Wells, chief investment officer for global fixed income at Fidelity, believes investors looking at emerging market debt must not overlook Asian High Yield, which has started to become an asset class in its own right.

“While September and October have been particularly brutal, the early signs for November are that the market seems to be recognising this negative price action may have been overdone. We are finally seeing some positive price gains from the underlying bonds within the Asian high-yield universe,” he says.

Peter Eerdmans, a portfolio manager at Investec Asset Management, does not believe advisers and investors should view the recent problems as a solely emerging markets crisis, as the situation came about as a result of global economic concerns that simply spilled over during September and October.

“The extremely good times that were enjoyed between 2005 and 2007 are over, with the huge positive trade balances likely to turn into deficits over the next 18 months,” he says, “However, the fundamentals do not point to a balance-of-payments crisis.”

Mr Eerdmans points out that there has already been a lot of financial support from authorities around the world, while a number of emerging areas – such as Turkey and South Africa – have room to help themselves by cutting interest rates.

“We do not expect these countries to go into a multi-year recession – with the possible exception of those Eastern European nations that are in trouble,” he said. “Latin America and Asia should certainly come through it OK.”

Comparisons with previous global economic crises, he points out, are unfair. The fundamentals are vastly different. “Emerging markets are going into this with a lot more power and strength than they went into either the Russian or Asian crisis. This means they are in a better position.”

Others, however, are far more pessimistic. Stuart Thomson, chief economist at Ignis Asset Management - formerly Resolution Asset Management - believes emerging market economies could be in crisis for the next three years.

“These are going to get much worse because we are going into a coordinated global recession among the major economies and that is going to feed through to the emerging markets,” he says.

The recession among the G7 countries is likely to last for another 18 months, he suggests, and this means the outlook for a variety of emerging markets will be very poor for even longer.

“The most vulnerable will be those, such as eastern Europe, that have behaved more like traditional emerging markets over the past few years with current account deficits. There is no such thing as decoupling in a global downturn,” he says.

However, Baillie Gifford’s Mr Brown believes emerging markets do offer ongoing attractions to investors, although he admits that the risks involved mean they will not be to everyone’s tastes. Principally, he believes there is plenty of scope for emerging market bond yields to converge with those seen in developed markets – and for currency appreciation over time as productivity in these markets catches up with other areas of the world.

He says: “The indiscriminate nature of the sell-off does create opportunities for active investors. We also need to recognise that these markets will remain volatile for the foreseeable future and that may not be appropriate for all clients.”

Main points:

The decoupling theory has started to implode as emerging markets experience vast outflows from equity and bond funds, combined with slowing growth

Hedge funds forced to sell have contributed significantly to the emerging market sell off

Outflows have been indiscriminate, meaning that value opportunities exist for the discerning stock picker. For example, despite the volatility of commodities, Brazil arguable still has much to offer

Some argue that, making the distinction between sovereign and corporate debt, the former is likely to be a safer play

Asian high-yield debt has started to become an asset class in its own right

If recession lingers in the G7 countries for the next 18 months, as anticipated, the economic outlook for emerging markets will remain negative for even longer