NEW YORK (The Street) -- Japan, the star performer among developed equity markets with a stellar 57% return last year, has taken a beating in 2014. But several fund managers say the correction may only be temporary, before the next leg-up for Japanese stocks.
The Nikkei has fallen more than 10% already this year, as emerging market jitters caused investors to rush to safe haven currencies like the yen, depressing the global competitiveness of Japanese firms. Coupled with this is a growing skepticism on the effectiveness of structural reform in Japan -- crucial to the sustainability of the nation's recovery from decades of deflation. The losses are a stark contract to the Nikkei's surge in 2013, when domestic monetary and fiscal stimulus depressed the yen and bolstered optimism on the economic outlook.
Yet a breather after such strong gains may be necessary, Prudential Financial market strategist Quincy Krosby said. "Often a correction leads the way to more attractive valuations," the New Jersey-based strategist said in a phone interview. "Many investors have moved not just to large caps, but are looking at small- and mid-cap stocks in Japan (an indicator of underlying confidence)." Prudential oversees about $1 trillion in funds under management.
Krosby said a sufficient period of calm in emerging markets would be key to any halt in the correction. She suggested Japanese stocks were not significantly more vulnerable to uncertainty on the emerging nations outlook than other developed equity markets.
The strategist said concerns around Chinese growth -- the second largest economy -- were also underpinning jitters over the prospects for emerging markets. Global equity markets were in the red Monday, after China's Purchasing Managers' Index (a key gauge of manufacturing) weakened to 50.5 in January from 51 in December. Emerging economies with large current account deficits are also seen as particularly vulnerable against a backdrop when US stimulus is being wound back - so-called 'easy money' that has helped fund the deficits in many of these countries.
ING U.S. Investment Management's head of international equities, Martin Jansen, agreed the pullback in Japan may be temporary. He notes that when adjusted for currency moves, the Nikkei has only fallen around 5% this year -- not drastically different to falls in other developed markets such as the S&P 500, which has shed around 4.6%. "The question is whether this is short term, or a protracted period where the yen strengthens further," he said in a phone interview. ING oversees about $196 billion in funds.
At a stock level, the worst-performing large banks globally in January were those based in Japan and China, Keefe, Bruyette & Woods analysts noted. But they also suggested potential upside amid the market rout. "For banks without specific large exposures to individually exposed countries (Turkey, Argentina, South Korea, South Africa), history would suggests the sell-off should be a buying opportunity, with the caveat that timing purchases is difficult," director of research Frederick Cannon told clients in a note.
By Jane Searle in New York