The Bank for International Settlements has an interesting report out comparing lending to emerging markets in 2011 against the environment after the collapse of Lehman Brothers in 2008. Both periods saw a contraction in lending but for different reasons.
[caption align="alignright" caption="Africa needs Europe to stabilize in order to resume its outperformance"] [/caption]
While the report generally warns of the ongoing dependence on developed markets for fund flows, the data may help traders position for developments in 2013.
The graph below, from the BIS report , shows the fund flows to four emerging regions and the total flow to the emerging markets. We see two periods of relatively deep contractions in lending, during the financial crisis and again in 2011 as the European Debt Crisis worsened.
The report shows that the contraction in lending following the collapse of Lehman Brothers could be attributable to a general reduction in demand for lending from the regions and typical investor positioning away from higher risk assets. In contrast, the decrease in funding over the last year was more attributable to weakness in source countries, specifically in the EU region.
The graph, and other information in the report, points to relative weakness in emerging Europe and EMEA. Latin America, with its larger relative dependence on Spain, also weakened but not to the extent of the other two regions. Emerging Asia did not entirely escape the contraction in funding but did relatively well due to a greater reliance on lending from North America.
A look at the performance of the regional ETFs largely confirms the idea with the SPDR S&P Emerging Middle East and Africa ( GAF , quote ) and the SPDR S&P Emerging Europe ( GUR , quote ) underperforming over the period. The iShares S&P Latin America 40 ( ILF , quote ) and the SPDR S&P Emerging Asia and Pacific ( GMF , quote ) have largely moved in lockstep with short periods of divergence.
Positioning going forward depends on your confidence that the EU will be able to work through its crisis and growth will return in the next couple of years. The markets have looked favorably on recent developments and concerns have mostly shifted to fiscal cliff problems in the United States. If the EU countries can continue to strengthen, then the EM Europe and EMEA regions should reverse course and start to outperform. If you believe that the debt crisis will flare up again in 2013, as I do, then you may want to position for further weakness in the two related EM regions.