It has become the norm to see Asian equity markets rise and fall in tandem with the United States. In the past several years, the lack of market volatility saw rising correlations among asset classes and markets across the board. This has been boring for traders and challenging for institutional investors trying to diversify their portfolios.

Lately, however, the favourite buzzword in Asian markets has become ædecouplingÆ. More fund managers are trying to figure out whether Asian markets have become more independent to those in New York. Hedge funds hoping to make a killing may bet on the notion that a sea change in correlations has already taken place.

Traders and investors generally focus on the decoupling of Asian stock markets from the US stock market, defining it as the ability of those stock markets to move independently and sometimes in opposite directions. On the other hand, economists and academics look more to the decoupling of the economies of the various Asian countries from the economy of the US and the other western developed countries.

It is now possible to see evidence of decoupling from both perspectives, says New York-based Gary Duberstein, who was general counselor to Carl Icahn before co-founding the Asian-based hedge fund Verde Fund, along with Hong Kong-based Glenn Fung and Sydney Yeung.

Behind his lawyerly caveats, he says decoupling is taking place: ôMy nuanced answer to the question of the existence of decoupling is, æSometimes, but getting [to be] more often.Æö

In terms of macroeconomics, data suggests modest decoupling. The US-bound share of exports leaving East Asian ports has dropped to 18% from 25% five years ago. The change reflects a greater degree of intra-Asian trade, particularly Chinese imports from the rest of the region.

ôPeople who source goods in Chinese factories are beginning to complain of being shunted aside, as the entire production runs of certain plants are being reserved for Chinese domestic consumption only,ö Duberstein notes.

The next piece of macro evidence: the possibility that AmericaÆs consumer spending will harm Asia as the US housing slump works its way through the economy.

The Asian Development Bank calculates a slowdown of 1% in US GDP growth will cause East Asian economies to slow by 0.5%, according to a paper written in June.

That may show interdependence but would still leave East Asian economies growing at a robust 7% per annum. So the US would have to go into recession, rather than just slow down, to upset the Asian growth story. So again: a modest decoupling, as America stumbles and Asia rolls on.

In terms of financial markets, hedge funds seem to be preparing for an even more dramatic parting of the ways. This appears to have taken place during the summerÆs credit crunch, inspired by AmericaÆs subprime mortgage mess, when Asian equity markets powered ahead. There are still correlations û the US markets were also up û but clearly these regions are marching to different beats.

Simplistically, what seems to be happening is that Asian markets outpace any day-to-day increase in New York, but they mimic, and often magnify a fall on down days.

ôOnce the unusual conditions subside,ö says Duberstein, ôthe trading markets should go back to the type of decoupling that allowed the Korean, Indonesian, Hong Kong and Thai markets to have risen on the order of three to four times that of the percentage increase of the Dow and S&P in the first place. And, the strong relative growth story of East Asia should remain intact.ö

Spotting the tipping point at which decoupling occurs is not necessarily a binary call, because decoupling is not necessarily black and white, it can ebb and flow, or occur to differing extents across markets and sectors.

Ultimately, diagnosing whether decoupling took place in 2007 will be assessed by empirical factors and history. At present, however, there is evidence to suggest that divergence is indeed taking place.