By the year 2010, it would be no surprise if 45 per cent of the value in world stock markets was in what we now think of as emerging markets. The current figure is 15 per cent

Follow the trail of the money, said one of the White House moles who led the Washington Post reporters Woodward and Bernstein to unmask the Watergate scandal more than 20 years ago. It was wise advice then and it is wise advice now, advice investors of all hues can - and should - put to advantage.

Find out where investors are putting their cash and, in the short term at least, it will tell you most of what you need to know about which markets are moving and why.

Jobbers and bookies have known this for years but now, perhaps belatedly, the habit seems to be spreading to the punters as well.

Flow of funds analysis - who is investing where - is now a standard feature of the mountains of research on the UK markets pumped out by the major broking houses. It is also an increasingly popular tool with professional fund managers, ever mindful of the need to watch what their competitors are up to.

Graham and Dodd spelled out the rationale for following the flow of funds years ago. In the long run, they said, the stock market is "a weighing machine". (Translation: Over time share prices must reflect the economic value of the businesses they represent.)

But in the short run, it is a "voting machine - and the votes are counted in money". (Translation: Where investors are putting their cash is what counts if you want to know where the market is going to be next week or next month.)

The current verdict from the polling booths is clear: investors are still bullish about the UK stock market. But what about the rest of the world?

Until Michael Howell of Barings Securities started analysing the numbers a few years ago, there had been no easy way to find out exactly where investors had been putting their money overseas.

Given the huge surge in cross-border equity investment, this was an anomaly waiting to be corrected. The last decade has, after all, seen a huge surge in overseas investment, with UK fund managers well to the fore since the abolition of exchange controls in 1979. More prominent still have been the big US pension funds and a host of mutual funds and private investors. Between them, they have helped to create the "emerging markets" craze of the last five years, driven in part by a landmark ruling in the 1970s that said they had a duty to diversify their portfolios.

The numbers, as chronicled in Mr Howell's latest analysis, are certainly striking. Since 1979, investors have put $725bn (pounds 470bn) into the equity markets of other countries.

The trend is clear, if highly volatile. The peak year was 1993, when the flow reached the best part of $200bn. Of this amount roughly a third went into "emerging markets".

Since then, the total has fallen sharply. The Mexican crisis last Christmas put the wind up a number of investors, Americans in particular. It led to a noticeable repatriation of money from Latin American markets, and many other popular emerging markets fell back in sympathy. Now they are starting to rev again.

Even after the difficulties of the past 18 months, this year's total equity investment overseas will still be the third-largest on record.

Mr Howell reckons that one in five of all share transactions worldwide now involve either a foreign investor or a foreign security. Within this total, emerging markets have gone from nowhere 10 years ago to 14 per cent of total overseas equity portfolios.

The Americans are now exporting more capital each year in real terms than they did during the Marshall Plan, when US capital financed the rebuilding of Europe after the Second World War. The big question now is whether the trend is going to continue.

Mr Howell has no doubts.His conclusion is that cross-border equity flows are here to stay, that this will make world stock markets increasingly volatile and that the long-term case for investing both in overseas markets in general - and emerging markets in particular - remains undimmed.

He thinks that the markets to watch are those in the Far East, eastern Europe and Russia; the ones to worry about are in Latin America and Africa.

The underlying reason is simple: economic power is migrating, as it has done throughout history. What differentiates the growth countries in the Far East and to a lesser extent eastern Europe is that the capital they are attracting is serious long-term investment capital, not the flighty stuff that has been in and out of many South American markets.

Increasingly, too, it is not just Western money that is funding the growth economies of the Far East. The newly rich in countries such as China, Taiwan, Korea and Singapore are funding each other's developing economies as well. If history is any guide, where industrialisation is today, financial markets must surely follow tomorrow.

By the year 2010, says Mr Howell, it would be no surprise if 45 per cent of the value in world stock markets was found in countries we now think of as emerging markets. The current figure is 15 per cent.

These countries will all have stock markets, bond markets, pension funds and all the other trappings of a developed financial system.

Again if history is any guide, those who invest in these markets stand to gain a double benefit.

Share prices will rise as the economy grows and the more this goes on, the higher the value that the world's investors will put on the earnings of the companies they are investing in.

The flow of money , in other words, will reinforce the underlying growth in the "real economy" and will create a sustained, long-term bull market in places like Taiwan, China and Russia.