A debate on whether Hong Kong and other Asian markets can decouple as the bears take control on Wall Street is likely to intensify in the weeks ahead. Jardine Fleming Securities has published a report, Defending Against Equity Risk, which sizes up Asian markets in terms of correlations to key United States stock indices. While interest rates are peaking, US stocks are trading on valuations that have yet to discount the effect of a long-awaited economic slowdown on corporate profit growth. 'The increase in US equity risk comes just at a time when the correlation between Asia has reached the top of its historical range,' the report said. 'South Korea turns out to be the market most sensitive to US valuations, followed closely by Hong Kong.' Some strategists take JF's side and warn Hong Kong investors should head for the exits if the US starts sliding. Morgan Stanley Dean Witter's Ajay Kapur said: 'If there is a bear market [in the US], clearly the correlation is very high and it is unlikely we can decouple. Every time there has been a sharp correction in the United States, in 1984, 1987 and 1994 even, Hong Kong gets hurt a lot more severely. Hong Kong will always take its cue from the US.' SG Securities' research accountant in Singapore, Amit Thakar, agreed. His house had a long-term underweight position on Hong Kong in its Asia ex-Japan portfolio, partly because of the links to US markets - the Hong Kong dollar is pegged to the US dollar and the SAR's property market tended to track that in the US. In contrast, Mr Thakar said, substantial manufacturing sectors meant 'Taiwan and Korea are well supported as markets in their own right'. Not everyone in the investment community is gloomy about Hong Kong's chances of shrugging off a bearish Wall Street. UBS Warburg Asian equity strategist Ian McLennan has a positive scenario for the many institutional investors who are now posing the question of where Hong Kong is heading with a US slowdown looming. 'If we get a soft landing [in the US], then we can decouple,' he said. 'The obvious reason is we are in very different economic cycles.' UBS Warburg is forecasting Hong Kong's gross domestic product growth this year will soar to 7 per cent, up from 2.9 per cent last year, before easing to 3.9 per cent next year. For the US, the house is making an above-consensus forecast of 5 per cent for this year, slowing to a consensus 3.2 per cent next year. After being a long-time follower of the Dow Jones Industrial Average, the Hang Seng Index has for the past year switched its allegiance to the more volatile Nasdaq Composite Index. If the Hang Seng Index were to return to following the steadier Dow, that would help Hong Kong decouple, Mr McLennan said. 'The scenario is that the Dow is likely to go nowhere for the next year while Hong Kong can make progress,' he said. Hong Kong might react on a day-to-day basis to heavy slides on Wall Street but in the medium-term profit growth would be the factor that won out, Mr McLennan said. UBS Warburg is expecting Hong Kong's pre-exceptional corporate profit growth to be a compounded 14 per cent for this year and next year, against 6.5 per cent last year. Salomon Smith Barney Asian equity strategy head Han Ong said that, taking a historical view, Hong Kong could mimic Japan in 1987 when it quickly shrugged off the effects of Wall Street's Black Monday crash. Hong Kong may now be in a similar cycle to the early 1990s when it rallied on falling interest rates, then fell as the US Federal Reserve began tightening again in 1994, only to go into a new bull phase towards 1996 as earnings growth came through. The market had already gone through its rate-easing rally in 1998, then fell as the Fed reversed course starting in the middle of last year. If the Fed engineered a soft landing, Mr Ong believed Hong Kong could complete the cycle by rallying on earnings growth. Investors might be in for a pleasant surprise if the Fed decided to sit on its hands at its meeting on Tuesday and there were clearer signs interest rates had peaked. 'For the short term there might be a relief rally. The potential for a summer bounce is quite high,' Mr Ong said.