HONG Kong is no longer a home for investors seeking to diversify their global investment portfolios. The table shows Hong Kong, Singapore, Malaysia, Thailand, the Philippines and Australia are highly influenced by Wall Street. Geographic diversification in investment strategy is where investors spread their risk of investment over a range of market with differing risk profiles and conditions to smooth out the bumps associated with something going wrong in any one market. Also the diversification argument goes there are actual benefits to be had from diversification into emerging markets in the long term. Diversification over emerging markets can offer the investor enhanced returns for the same risk profiles of highly diversified international or managed fund portfolios. However, all this might just be a temporary chimera as capital flows change. The globalisation of capital flows, part of which is actually associated with the diversification process itself, has meant there has been a slow convergence in stock market correlation around the world. The convergence of stock markets globally has been accelerated by the increasing number of fund managers in the United States who have been won over by the diversification argument. Globalisation of capital flows have been helped by the deregulation of capital and commercial markets worldwide. In the period 1991, in the aftermath of the Gulf War, to 1993 United States capital outflows were significant factors in boosting the liquidity explosion seen in many stock markets around the world, especially in Asia. Hence a five-year correlation study by Morgan Grenfell Asia shows Asian stock markets are correlated more closely than ever to the whims, the dips and turns of Wall Street. It concluded Indonesia and New Zealand offer the safest strategies for investors seeking out overseas targets, that have a low correlation with major international capital markets. In a similar study by James Capel Asia, the safe strategy portfolio also picked on less-developed markets such as India, the Philippines, South Korea, Taiwan and Thailand. It might be too early to writing off the diversification argument. This is because the James Capel Asia study found correlation between stock markets around the world increases in periods of great volatility. This happened in the October 1987 world stock market crash, the Gulf War and in the wake of the rise in US interest rates in February. It is wrong to make any judgment about the diversification argument, especially when talking about investment in Asian markets, because we are going through a period of great volatility in global markets. Unfortunately, the highly diversified investor can get hammered in these periods of high global volatility. Paul Schulte, strategist at CS First Boston, maintains the arguments for diversification is a no brainer and it pays to diversify, it always has and always will. There will always be a give and take between the desire to diversify internationally and the effect on emerging markets of rising interest rates caused by investing in emerging markets. In a series of test studies, examining periods of high volatility globally, covering 1986-1994, 1987-1988, 1990-1991 and 1983-1983, the investment bank, by trial and error, sought out the optimal diversification for the Asian region. The investment bank found the following weightings in the region provided a similar risk profile to investing in the US, while offering a 40 per cent higher return. These optimal weightings are Hong Kong 33 per cent, Thailand 20 per cent, Singapore 18 per cent, Malaysia 17 per cent, Philippines four per cent and South Korea, Taiwan, India along with Indonesia at two per cent each.