The Fed has created a perfect setup for beaten-down value stocks to outperform, says a Morgan Stanley portfolio manager

• Morgan Stanley Investment Management is "extremely bullish" on value stocks, especially after the Fed's decision to keep on its current policy trajectory.
• For value stocks, continued liquidity and a continuation of Fed policy means sustained performance, a best-case scenario.
• The portfolio manager also advised caution growth stocks.
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Morgan Stanley Investment Management is "extremely bullish" on value stocks, especially after the Federal Reserve's decision to keep its policy in place until the US economy rebounds last week.

With the move, Andrew Slimmon, managing director and senior portfolio manager, said the Fed has created a best-case scenario, especially amid the current recession. Continued liquidity and no change in policy means sustained performance for value stocks, he explained, which is why he sees "much more upside."

"As you can see, in recessions, value stocks become unusually cheap," the manager said in a recent report published "This past recession, value became even cheaper than the previous three recessions!"

Post-recession, though, Slimmon said value stocks -those often undervalued, typically well-established companies, and have lower price-to-earnings ratios - repriced back to a "modest level of expensiveness (above 0 standard deviations)." That means these stocks have outperformed.

More specifically, Slimmon said he is bullish on financials, which comprise 61% of his growth bucket. No other sector is above 10%, he said. With long-term rates rising as well as continued liquidity, financial services is a buy for the manager.

As for growth stocks, the manager advised trading with caution. Growth stocks are those expected to outperform based on future potential. While Slimmon said growth stocks are not at risk for a meltdown similar to what happened in 2000-2001, the 50 fastest-growing companies are trading at "bubble territory levels."

Many of these companies, he said, are not making any money, and once rates start to rise, they will be even more at risk.