Japanese equities emerged as major laggards in the region on Monday, falling as much as 4 percent after a volatile previous week, raising questions over where the world's top performing market is headed next.
While optimism among Japan bulls appears to be largely intact since last week's sell-off, Kingsley Jones, founder and chief investment officer at investment advisory Jevons Global believes it's time to be "really cautious" on this market. Jones added that he is considering turning short on Japanese equities "in a little while."
The benchmark Nikkei 225 has lost 11 percent since hitting its five and a half year peak of 15,942 last Thursday. However, it still remains up almost 37 percent year to date.
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"At 16,000 on the Nikkei, you have really priced in a huge amount of whatever recovery might come," he said, cautioning that the market had gotten far ahead of itself.
According to Jones, it will take 18 months before the positive impact of the massive monetary stimulus announced on April 4 actually shows up in the economy.
He added that the sell-off last week, which resulted in the market's biggest one-day drop in two years on Thursday, was a "warning shot" that money flowing into Japan isn't there for the long haul, and is ready to come out at the first sign of trouble.
"So much can go wrong from a funds flow perspective: when you have a lot of international hot money buying this market in a short space of time, it could just as easily reverse," he said. "As an investor, I would be more comfortable buying Japanese stocks if the rate of returns were much less steep."
Foreign investors have played a central role in driving gains in Japanese equities this year, pumping over $60 billion into the market as of end-April.
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