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Why the odds of a Santa Rally for ASX stocks just got better

Hopes for the seasonal end-of year share market rally for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has improved significantly over the weekend as global trade tensions eased over dinner between the US and China.

The risk of an escalating trade war was the second of two major issues vexing international investors, and news that US’ Trump and China’s Xi agreed to hold off imposing fresh tariffs should trigger a rally on our market today.

It’s kicking the can down the road but at least investors won’t have to worry about the escalating trade war till April 2019.

They won’t have to worry about multiple hikes in US interest rates either, which was the first issue that wrong-footed the market bulls.

US Federal Reserve chair Jerome Powell surprised markets last week when he suggested that the cycle of rate hikes was fast coming to a close.

Return of the Growth vs. Value debate

With these two risks taken off the table (at least for the near-term), bulls should have a clear run into early 2019 and fund managers are sitting on a lot of cash that they will be eager to put to work.

The big question though is which ASX stocks are most likely to lead the market higher – growth or value?

Growth stocks have outperformed the S&P/ASX 200 are trading on high price-earning (P/E) multiples. These include the likes of the Altium Limited (ASX: ALU) share price, Afterpay Touch Group Ltd (ASX: APT) share price and CSL Limited (ASX: CSL) share price.

Value stocks have lagged and their depressed share price puts them on more attractive P/E multiples although buying these so-called bargains over the past several months would have cost investors.

Stocks riding on Santa’s sleigh

As I’ve mentioned in earlier articles, I believe value stocks will start to shine in the next market rally (i.e. the Santa Rally) although this isn’t a hard and fast rule as I think there are some growth stocks that are well placed to jump higher, such as Afterpay.

But on the whole, I am expecting value stocks to outperform as they normally do in a late-stage bull market.

Given their valuation discount, these stocks are also arguably more resistant to bad macro-economic news – and I am pretty sure we will encounter those in the not too distant future.

Some value stocks that I think will outrun the market include the beaten-down oil services company Worleyparsons Limited (ASX: WOR) share price and agriculture products group Nufarm Limited (ASX: NUF) share price.

Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO, CSL Ltd., Nufarm Limited, and WorleyParsons Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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