Volatility on Asian and Japanese markets will affect the performance of Irish pension and investment funds this year. But the impact will not be significant because of the small proportion of fund assets now invested in these markets.

More significant for Irish fund managers is the concern that the economic problems and volatility of markets in the region will slow world economic growth and destabilise equity markets worldwide.

The average Irish pension fund has about 3 per cent of its assets invested in the equity markets of the Pacific region and another 3 per cent invested in the Japanese market.

The spread for most unit-linked funds is broadly similar. But there are a small number of funds specialising in the Japanese or Pacific region markets or in a mixture of these markets and other specific markets.

The 22 per cent fall in Pacific region markets would knock just about 0.6 per cent off the value of a fund with 3 per cent of its assets invested in that region. But a fall in values in any one market or region must be seen in the context of the overall geographic spread of a fund. Despite the sharp fall in values in the Pacific region in 1997, Irish pension funds produced average growth of 34 per cent. This reflected the wide spread of their assets and strong performances in a number of areas, including the Irish market.

Most Irish fund managers reduced their exposure to the Asian and Japanese markets throughout 1997 on concern about the mounting economic problems in the region.

The average Irish fund had 4.5 per cent of its assets invested in Japan and 6.2 per cent invested in the emerging markets of the Pacific region at the beginning of 1997, according to figures produced by Mercer Investment Consultants.

Canada Life, for example, had the highest exposure to the Pacific markets at 8.3 per cent of assets at the beginning of 1997, but by the end of the year its exposure had been reduced to 3.2 per cent. Eagle Star reduced its exposure from 8 per cent of assets to 2 per cent.

One fund manager commented that he became frustrated with the Japanese government's failure to deal with problems in its economy and in its financial system. Another said he had been concerned that the Hong Kong market was vulnerable to political disappointment following the handover to China, while any good news was already built into prices. Another said there had been signals that all was not well for some time, such as the 30 per cent drop in share prices in Korea in 1996 and the Thai banking crisis.

Fund managers said the outlook for these markets now depends on how quickly they can stabilise. One fund manager explained: "First there is concern, then panic, instability and then recovery. The markets will have to stabilise for a period before investors will be prepared to go back in and look for long-term fundamental value. Only when investors start buying undervalued share will the market start to go up again. But there are real businesses there and there is potential for recovery."

Investors will want to see appropriate policy responses from the governments of the region and "some commitment to sackcloth and ashes", as one manager commented.

Corporate earnings reported in the US in coming weeks will be watched carefully for comments on the likely impact of the Asian crisis on expected future earnings.