The first quarter of 2003 has been another difficult one for Irish pension funds, writes Eugene Kiernan. Global stock markets have been whipped around by the uncertainties of the conflict in Iraq, while the underlying economic situation remains fragile.

Bonds and property have seen small positive moves and the Irish equity market was fairly resilient, but not enough to offset weak global equities, which typically make up about 50 per cent of a pension fund. Weaker global currencies relative to the euro compounded the damage.

Irish pension funds will probably see a decline of around 5 per cent in the first quarter.

The war in Iraq is having a huge impact on market returns. We saw this especially in March, when markets were moving by 5 per cent or more on a daily basis based on news flow from Iraq.

Markets took some comfort from the start of the war but this faded over the subsequent week as some of the more optimistic projections on the likely time-line for the conflict were revised.

While there are bigger humanitarian issues with the war, markets are focused on how quickly it may get resolved and its impact on oil prices and the financial costs associated with the effort.

The oil price has come down from the high levels of around $35 in the days leading up to the conflict and finished the quarter at the $28 level. Estimates on the cost of the war will rise until there is some visibility about its resolution.

The war is also having an impact on consumer, business and investor confidence. We have seen weaker consumer confidence data here and in the US, where it is at its lowest level since 1993. Business confidence is also low and it is hard to see significant capital spending taking place until it recovers.

For investors, there is little of comfort and while we did see, in the US, the first signs of inflows into equity-based mutual funds in the past week, generally we have seen investors shying away from stock funds.

European markets bore the brunt of the downturn in the first quarter - falling more than 12 per cent. The Netherlands was the biggest loser. It was down more than 22 per cent. Stocks were hit by troubles at retailer Ahold, where accounting issues surfaced in the first quarter, which had a knock-on effect on some leading financials.

Germany was little better, losing 16 per cent in value. The German economy continues to be the weakest in the euro zone and the market broadly reflects this.

In the US, the broad S&P 500 index only lost 3.1 per cent in value over the quarter. It was buoyed by strong performances from many technology stocks. The Nasdaq, which is heavily weighted towards technology, managed to post a small gain.

The Irish index was also a relative out-performer in the first quarter of 2003, dropping only 0.6 per cent against a global decline of 6 per cent.

The market was hampered by weak numbers from Waterford Wedgwood, where the share price halved, but boosted by strong numbers from CRH, which was up more than 12 per cent.

Bonds and property proved their mettle as the defensive component of a pension portfolio in the quarter. Euro-zone bonds did better than their US counterparts in the face of a sluggish economy and the possibility of further interest rate cuts. Irish property held up reasonably well also as better values from the retail sector offset any pressure on the office side.

Where now for markets and pension funds? The biggest issue for markets remains the progress of events in Iraq and any unforeseen circumstances that may result. The sooner we see a resolution, the better it will be for global business activity and share prices.

Investors can take some comfort from the revival in interest in many companies looking to go private or being the subject of acquisition activity. Here we have seen activity in Riverdeep, Alphyra, Sherry Fitzgerald and Arnotts; in the UK, Safeways and Six Continents. This type of activity, together with a noticeable pick- up in director buying on both sides of the Atlantic, reveal a perception of value in share prices from the people who know the business best.

Eugene Kiernan is head of asset allocation at Irish Life Investment Managers