The Asian economic crisis should have only a very limited effect on the Irish and European stock markets, according to Allied Irish Bank Investment Managers (AIBIM).

In its latest investment update, AIBIM, which manages assets of £7.7 billion, said the exposure of the western economies to the Asian region was relatively small and added there were several compensating factors.

It said cheaper imports from Asia reduced inflation and "other things being equal, boost real incomes." It added that the favourable inflation effects would help to reduce long-term interest rates or bond yields, which act as an economic stimulus.

"Unless there is a further meltdown in Japan the western markets should perform solidly," said Mr Tim Walsh, AIBIM's head of research and chief economist. However, he added that there was some risk of a delayed impact from developments in Asia because Asian companies were having difficulties raising trade finance.

He said the US economy was most exposed to Asia, but still he did not envisage any major correction to US earnings. "There is a strong pension component to the US equity market which gives it a lot of extra support," said Mr Walsh.

AIBIM said a significant amount of funds from continental Europe were currently coming into the Irish equity market. It said the poor performance of many German equities meant many investors were looking at Irish equities.

The US investors who are also entering the Dublin market are not here on a short-term basis, sheltering from the Asian crisis, but long-term investors impressed with many of the first-line Irish stocks, said Mr Maurice Harte, AIBIM's managing director.

Mr Walsh said the outlook in Ireland was "benign", and he forecast an inflation rate at the end of this year of 2.5 per cent and 3 per cent in 1999. He added that growth in the Republic this year should reach 7 per cent by the end of the year and 6 per cent by the end of 1999.

AIBIM said that low inflation and low short-term interest rates should also keep long-term bond yields relatively low. "Rationalisation should still be a feature of the global financial and pharmaceutical sectors, while the continuing process of deregulation will benefit companies in the telecommunications sector," the update said.

On the future of the group pension scheme market in Europe, AIBIM said that Europe-wide pension schemes were now a serious possibility.