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Look to Japan for top 2014 play: Pro

Godfrey: Bet on Japanese small caps

Japanese small-cap stocks represent a strong area of opportunity in 2014, Brooks Macdonald Asset Management's top investment strategist said Wednesday.

"Small-cap Japan is the under-the-radar catch-up play because Japan has the only small-cap sector that lags large caps," Gemma Godfrey said. "And some of these companies are only being covered by a couple of analysts, so the potential for mispricing is significant."

On CNBC's "Halftime Report," Godfrey said some of the sector's benefits have been long in the making.

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"There are also clear catalysts in terms of consolidation. We've seen $100 billion of M&A in the last year alone, as well restructuring and reform," she said. "If we look, we've seen two decades of cost-cutting, and companies are finally starting to benefit from this."

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Godfrey noted that cost-cutting wouldn't benefit all Japanese companies equally, and she suggested being more selective.

Japan's rally, she added, is "now being 85 percent driven by earnings instead of valuation re-rating, which was driving most of the markets, especially in the early part of last year."

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"And the final kicker for small cap—well, for Japan in general—is that there's room for people to allocate more," she said. "If you look at the Japanese pension funds, for example, they are allocating such a small amount, and they've already started to increase but, again, from a very low base, only about 8 percent allocated to domestic equities."

Godfrey added that individual investors in Japan this month have been given tax exemptions for investing in certain stock markets, which would further boost Japanese equities.

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"Going long Japan in general, especially the large caps, has become a bit more of a consensus trade," she said.

"So, therefore, we're trying to look and see, well, where are the opportunities going forward. And even though we are still bullish on Japan in general, if you're looking for valuation, especially seeing how far the markets have run in the U.S. and in other markets, as well, small-cap Japan you still have attractive entry points there."

By CNBC's Bruno J. Navarro. Follow him on Twitter @Bruno_J_Navarro.

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