Investors should take funds out of Hong Kong and South Korea and concentrate on markets in Southeast Asia to protect against regional fallout from higher interest rates in the United States. This is the view of Dresdner RCM Global Investors chief economist Andrew Hunt, who expects interest rates will continue to rise over the next 12 months as the US combats inflation. However, the US Federal Reserve would act slowly to avoid collapsing financial markets, he said. 'If the Fed tightens too aggressively, the financial system crashes,' Mr Hunt said. Yields on 30-year treasuries are expected to peak at 7 per cent as interest rates increase. Long bond yields are already at a two-year high, reflecting the market's concern that interest rates will continue rising. The Fed's next rates meeting is scheduled for November 16. The benchmark federal funds rate is currently at 5.25 per cent. Inflation in the US would be driven up by rising prices of imports from Japan and Asia, Mr Hunt said. 'If Japan picks up, it will raise its export prices, then Asia can and that's a sizeable part of the US import bill.' The Asian crisis kept a lid on US inflation in the past few years through the low prices of its imports while economic growth has been powered by a credit boom. 'It is no miracle economy . . . [and] what has been propelling the US economy is a credit boom,' Mr Hunt said. Hong Kong would suffer from higher US interest rates due to the linked exchange rate with the US dollar, which would exert upward pressure on local interest rates. 'Seven per cent bond yields are not consistent with a rising Hang Seng Index - I don't see a lot of reasons to be here as there are better places in Asia,' Mr Hunt said. The SAR would also suffer if Beijing did not devalue the yuan to help reflate its economy, he said. Korea was also expected to suffer as its surging economic growth would suck in imports which would drag than its current account into a deficit. 'By next summer Korea will have a current account deficit again - rising interest rates and current account deficits are not a good combination,' Mr Hunt said. Mr Hunt likes Asian markets which have earnings growth and a current account surplus, and they would not be caught financing deficits during periods of high interest rates. One of his favoured markets is Thailand, which he said was a safer play than Korea. 'It is less sexy in the short term . . . but it does have more sustainable growth,' he said. Malaysian and Singaporean stock markets were also expected to show steady growth, he said.