Japan Downturn Will Last Just 3 Months; Buy Small Caps: Pro

While the uncertainty surrounding Japan in the past few weeks may have caused some to avoid this market, one veteran Japanese fund manager says equities are still attractive, particularly in the small-cap sector.

"The smaller stocks are the ones that the value investors like the most," Curtis Freeze, Director and Chief Investment Officer of Prospect Asset Management told CNBC this week.

He says small caps have been outperforming their larger counterparts in recent months simply because they are more attractive in valuation terms.

In the last month, the Topix Second Section Index - which comprises small- to mid-cap company listings - traded at an average price-to-book ratio of 0.6, compared to the Topix First Section's price-to-book ratio of 1.0. Year-to-date, the Topix Second Section has gained more than 3 percent while the Topix has lost nearly 5 percent.

While Japan will struggle in the short term as it attempts to rebuild its economy, Freeze believes the long-term outlook remains robust.

"There will be a downturn that will last about three months, and then a strong recovery," he said, adding that the downward revisions by companies should be out of the way by March, the fiscal year-end for corporate Japan.

"So next year, the forecast is going to look even better than ever," said Freeze, which has $280 million under management in Japan-focused funds.

Construction-related companies may benefit in the wake of Japan's earthquake and tsunami disasters, but Freeze says he will not "chase them at this point", as they have had quite a run-up in recent weeks.

Housing stocks, according to him, are much more attractive.

He likes Iida Home Max - a small cap real estate developer. "None of their housing projects have been affected. They haven't been hit directly by the quake."

Japanese REITS that comprise offices and residential rental apartment buildings are also on his buy list.

Curtis Freeze does not have holdings in Iida Home Max. But his company has holdings in it.