Don't let today's weakness on the S&P/ASX 200 Index (Index:^AXJO) fool you. The new bull market is here to stay although the next phase of the rally could see investors rotate to value stocks from growth.
It's growth stocks, including tech darlings like the Afterpay Ltd (ASX: APT) share price, that's stolen the lime light since our market hit its bear market bottom in March.
But we may soon see the ASX value shares outperform as conditions seem ripe for these laggards to outperform.
Why value can outperform growth
The recent steepening of the yield curve and expectations of a V-shape recovery favour these underachievers, according to Morgan Stanley.
While there's great debate over the shape of the ongoing economic recovery due to the COVID-19 crisis, the broker is more convinced than ever of a quicker rebound.
"Our global team's increased conviction in a sharper and shorter economic downturn has projected a V-shaped recovery in global markets," said the broker.
"Coupled with ongoing stimulus roll-out across regions and within country, [these are] providing the support for improving Value signalling and performance over the near and long term."
What are value stocks?
Value stocks are those that tend to trade at a discount to the market or to their historical valuations. Growth stocks are those that trade at a premium as investors are willing to pay up for companies best placed to increase their earnings coming out of the recession.
"Expensive valuations and better growth should push bond yields higher and the curve steeper – a 'normal' early cycle pattern, with the global rates team forecasting steeper yield curves into year-end for both the US and Australia," added Morgan Stanley.
Top stock picks for new year
The broker highlights 11 ASX value stocks that it believes are the best of the bunch. Financial stocks on its list include Australia and New Zealand Banking GrpLtd (ASX: ANZ), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Link Administration Holdings Ltd (ASX: LNK).
In the industrials space, its top picks include cement supplier Adbri Ltd (ASX: ABC), building materials group Boral Limited (ASX: BLD), casino operator Crown Resorts Ltd (ASX: CWN), alcoholic drinks maker Treasury Wine Estates Ltd (ASX: TWE) and national carrier Qantas Airways Limited (ASX: QAN).
There're also one stock from property and materials each that Morgan Stanley favours. These are DEXUS Property Group (ASX: DXS), retailer Harvey Norman Holdings Limited (ASX: HVN) and BlueScope Steel Limited (ASX: BSL).
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