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.