News of another promising COVID‐19 vaccine will spur a further rally on the market but the best ASX stocks to buy for 2021 won’t be the same as 2020.
This is the second COVID drug in the past week that yielded a more than 90% success rate during human testing.
Best ASX buys are COVID losers
The best way to gain upside from this thematic is to rotate into ASX value stocks and so-called COVID losers, according to Macquarie Group Ltd (ASX: MQG).
In many cases, both stocks are one and the same. The reason why ASX stocks are in the “value” category is usually due to their underperforming share prices.
There’s a wide range of ASX stocks that have lagged during the pandemic. These include stocks exposed to tourism, property and financials.
Rotation from ASX growth to value stocks
We have already been seeing this shift towards value from growth. Growth stocks tend to be those that trade at a premium as investors are happy to cough up for better than market profit growth.
“Buying the laggards and selling winners was a good short-term strategy in the rally,” said Macquarie.
“We note there was an 18% return spread in favour of Covid losers in the recent value rally, and we think investors should continue to rotate to Covid-losers.”
ASX stocks on earning upgrade cycle
The broker pointed out that the ongoing annual general meeting (AGM) season is supportive of the rotation.
With around two-thirds of ASX companies providing updates during their AGMs, Macquarie noted there have been five times more companies upgrading their FY21 outlook than downgrading.
“Earnings upgrades are already at their highest level since 2005, and we have not even started to experience the post-vaccine boom,” said the broker.
“Maybe the FY22 PE is not high, it’s just that analysts’ forecasts are too conservative?”
Rising bond yields to also favour ASX value buys
Further, Macquarie believes bond yields are set to rise in 2021. It’s tipping the 10-year US Treasury yield will jump to 1.5% next year as successful vaccines will prompt central banks to remove some stimulus measures which have been depressing the yield to under 1%.
Rising bond yields are good news for embattled ASX banks and insurers.
Best ASX stocks to buy for 2021
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Brendon Lau owns shares of Seven Group Holdings Limited, Telstra Limited, Westpac Banking, and WorleyParsons Limited. Connect with me on Twitter @brenlau.
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