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Global emerging markets have been extremely lucrative for investment trusts over the past decade, but the jury is out on whether such performances are sustainable due to the economic pressure building up in many of these areas.

As well as being the star performer over the past three years with a 150 per cent rise, the sector has been second best over one, five and 10-year periods, according to the latest figures compiled by the AIC.

Annabel Brodie-Smith, communications director at the AIC, believes the figures illustrate the need for people to adopt longer-term investment horizons and have exposure to a variety of countries.

“Even over the last volatile year, the Global Emerging Markets sector has bucked the trend with strong, positive growth,” she says. “Not surprisingly this has resulted in strong demand for these companies.”

However, fund managers and IFAs are becoming increasingly nervous about the rising rate of inflation in many of these markets and fear this has the potential to derail their investment case.

Mark Dampier, head of research at Bristol-based IFA Hargreaves Lansdown, has concerns. Although acknowledging their rapid urbanisation marks them out as the “last great industrialisation” story, he warns investors to be aware of the risks.

“The argument in favour of emerging markets is that they can grow so much more because they are immature,” he says. “They have had a terrific run over the past five or six years but the biggest worry is the fact that there is a double-digit inflation rate in most of these countries and interest rates really need to rise.”

Mick Gilligan, director of fund research at Killik & Co, agrees. “We would be cautious on most emerging markets in the very short term, but still keen on the story on a three to five-year view,” he says. “Some of the frontier markets look better placed because they are producers of oil and benefiting from the higher prices.”

On the face of it, everything looks in good shape. The MSCI Emerging Markets index rose 2.1 per cent in GDP terms during May – the second consecutive monthly gain – and over the past year it has modestly outperformed developed markets.

However, the headline figures do not tell the real story, points out Austin Forey, lead manager of the JPMorgan Emerging Markets investment trust. Look a bit closer, he suggests, and there is a dividing line between the winners and losers.

“They disguise the distinct divergence in the fortunes of the various emerging market regions,” he says. “Investors shied away from regions heavily dependent on commodities, while continuing to invest in the markets that are seen as the greatest beneficiaries of the continuing high prices of commodities.”

This was illustrated by results on the ground. While commodity-related names soared, those related to credit and domestic demand suffered. The best-performing markets were all linked to the energy story with Russia, Argentina and Brazil enjoying strong gains, while India, China, Turkey and Egypt found themselves struggling.

The Templeton Emerging Markets investment trust has benefited from being exposed to Brazil – which accounts for 26.54 per cent of assets under management – and Russia which has an 11.08 per cent share. The oil and gas names, which combined make up almost a quarter of the trust, have also been a lucrative source of revenue.

As far as stock selection and asset allocation are concerned, JPMorgan’s Mr Forey says Taiwan and Korea have been the greatest contributors to returns during recent months. “Overweight positions in Mexico and Brazil, and being underweight Malaysia benefited the fund,” he adds. “Investments in China and South Africa also had a positive impact while being underweight Russia detracted from returns.”

Russia is certainly the favoured country of the Baring Emerging Europe investment trust as it accounts for 64.2 per cent of assets under management, according to the company’s latest fund fact sheet. The Russia oil giant Gazprom, meanwhile, is the largest individual holding with a 10.4 share of the trust’s resources.

Baring Asset Management’s Ghadir Abu Leil Cooper says the company’s stance is predicated on their view of the three most pressing factors facing emerging markets - the slowdown in the global economy, the availability of credit and the outlook for commodities.

“Emerging economies seem to be able to grow better on their own without reference to the US economy which was the case 10 years ago,” she says. “They are urbanising and this can be seen in the intra-regional trade numbers being published.”

The fact that Russia has a huge commodity base and provides commodities to fast-growing areas means that its own growth story is pretty much insulated from the overall global slowdown.

Second, the lack of credit which would have been a major issue a decade ago no longer presents such a problem to some of emerging Europe’s biggest names – but is still a hurdle to overcome for others.

“The credit crunch is affecting markets in different ways,” she explains. “While there are enough funds for countries such as Russia to continue to grow without external financing, the contrast is Turkey, where oil prices keep rising and it needs funding.”

The final piece of the jigsaw – the supply/demand story on commodities - is also favouring these regions. This means that when everything is taken into consideration, the outlook remains pretty positive for investors in emerging markets.

“If you put all these factors together – stronger for longer on commodities, supply/demand story continuing and the massive availability of credit in commodity producing economies – the investment case is intact,” adds Ms Abu Leil Cooper. “Russia will be able to fund itself and we do not think the growth potential is being reflected in the price.”

Which of the emerging market investment trusts are worth a look? Darius McDermott, managing director of Chelsea Financial Services, suggests the JPMorgan Emerging Markets trust and Templeton Emerging Markets investment trust. “The JPMorgan Emerging Markets trust has got a consistently good track record over five years and is run by a strong emerging markets team,” he says. “Templeton Emerging Markets has also done well and also gets our vote.”

Main points -

- Global emerging markets have been a lucrative area for investment trusts to invest in, but the glory days may be coming to an end as inflationary pressures increase.

- Although these markets are billed as the "last great industrialisation story", investors have to be aware of the inherent risks involved.

- There is a clear dividing line between the winners and the losers in terms of performance in this area. The winning trusts have greater diveristy and are more robust in the face of economic pressures.

- Russia is providing a particularly interesting investment case as it is underpinned to a large degree by commodities.