Recent volatility in major equity markets should be seen against the backdrop of a very strong run which has made an average investment increase its value six times over since 1980, according to an equities analyst.

But Baring Asset Management US equities specialist Christopher Goudie foresees a reduction in US equity exposures by savvy investors and a move to places like Hong Kong, even in the face of the impending 1997 Chinese take-over.

"The US has been in a very strong market for the last 16 years, in spite of the sharp correction in October 1987 of Black Monday,'' Goudie said. He forecasts a solo move by the US to higher interest rates, with the federal funds rate boosted 25 to 50 basis points by the end of the year. That move is expected to maintain the Federal Reserve Board's image as the inflation fighter, after a period of lower rates.

"In conjunction with earnings coming in at lower levels,'' said Mr. Goudie, "investors will reduce US equity exposures, certainly to the smaller cap stocks. We think the US is not the greatest market to invest in at this moment. Investors will move to other jurisdictions, such as Hong Kong.'' Mr. Goudie was recently in Bermuda speaking at Investment Management, the fifth annual seminar hosted by Kast Investment Management Ltd.

"We at Baring Asset Management believe that the market is overvalued,'' he said. "The fundamental environment globally is very positive for financial assets, both equities and bonds. You have benign inflation, slow economic growth in the major economies.'' He predicts that the US economy will continue to slow down, although it won't return to a recession. In Europe, growth is accelerating, but is capped by the budget deficits.

Mr. Goudie anticipates investors moving to Hong Kong because: "Cultural differences are expected to continue, although we are very positive in the market. We believe that Hong Kong will actually appreciate about 15 percent between now and the hand over.

"But we don't think it will be a straight line. We think there will undoubtedly be situations were the Chinese do or say something that raises political concern.

"But Hong Kong is a test case and they very much want this to go smoothly.

They will be more than willing to commit money to the equity markets to ensure a smooth transition.'' Japan enjoyed phenomenal growth in the first quarter, but that is not expected to continue because it was coming off an extremely low base that included last year's Kobe earthquake.

Analysts have been somewhat negative on Japanese banks, because of the large portfolio of bad loans they have been carrying. High profits are being used to write off bad debts.

Mr. Goudie believes the market will be positively surprised to find that the Bank of Japan will keep interest rates lower, longer.

He said: "The Japanese Diet recently passed a finance act that allows banks to restructure, and you are likely to see a lot of consolidation in the banking sector. It will lead to headlines and smaller banks going bankrupt.

"The Minister of Finance has been standing behind these banks and they no longer will have to do that. The banks will restructure and there will be negative headlines and in such an environment, the Bank of Japan will have to continue with low interest rates.'' But the Bank of Japan has to keep interest rates low to allow the banks to continue to make profits to pay off debt. And if, as speculated, interest rates go up in Japan, the Yen would strengthen, making it tougher for manufacturers to export. That, in itself, he said, would erode the road back to economic growth.

But he said: "Still further, next year the government is committed to introducing a consumption tax, which means the fiscal environment will get tighter. So the Bank of Japan, we believe, will keep the monetary environment looser for perhaps longer than they really ought to.'' Analysts with this month's edition of Financial Viewpoint, a publication of Butterfield Asset Management, said that interest rate sensitive demand components in Japan are leading the GDP recovery.

Housing and business investment are now responding to record low interest rates. With the jobs situation continuing to improve, the second half of the year should see a resumption of solid spending growth, and the recovery should positively impact corporate earnings.

If Japanese interest rates remain static and US rates, as Mr. Goudie forecasts, rises, the US Dollar will continue to strengthen against the Yen.

It would mean a problem for the US. Exporters would be affected.

Earnings of US companies have already peaked and starting to slide down and revenue growth is becoming a disappointment in some cases, as the economy slows.