We're almost at the end of another incredible year for the ASX share market. Many investors may be sitting on sizeable gains from various ASX sectors from 2024.
A year ago, I predicted that fund managers, certain ASX small-cap shares and retailers with a strong online presence would do well. Two years ago, amid a sell-off in the market, I suggested ASX tech shares could rebound.
Overall, I think my expectations have played out, but that wasn't too surprising, given that those sectors started from a devalued base.
Multiple parts of the markets have rallied in the last two years, and the valuations in those sectors may now be in 'overstretched' territory. It seems like difficult buying for investors who want to pay a good price.
When I invest, I think about the long term. What happens in the next 12 or so months won't change my general optimism about the future of Australia and the world.
I don't believe we should base our investment decisions on just the next 12 months. However, finding beaten-up sectors that are contrarian or undervalued ideas could be helpful for returns in the shorter-term and longer-term.
So, which ASX sectors could beat the market in 2025? For fun, here are my thoughts on how the next year could play out pleasingly for some areas of the market.
ASX REITs
As some readers may already know, I've been pointing out that many ASX real estate investment trusts (REITs) have been falling recently, with some trading close to their 52-week lows.
High interest rates have significantly increased the cost of debt and pushed down asset prices, including commercial property prices, hurting this ASX sector.
But, the Reserve Bank of Australia (RBA) is starting to see evidence that inflation in Australia is moving in the right direction. The RBA said in its December statement:
The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint.
Recent data on inflation and economic conditions are still consistent with these forecasts, and the Board is gaining some confidence that inflation is moving sustainably towards target.
If rates are cut during 2025, ASX REITs could get a real boost with their financials, their property valuations and investor confidence.
Some of the names I'm looking at include Centuria Industrial REIT (ASX: CIP), Rural Funds Group (ASX: RFF) and Charter Hall Long WALE REIT (ASX: CLW).
Listed investment companies
The listed investment company (LIC) sector has consolidated in recent years, with a number of mergers. Despite that, several LICs are trading at discounts to their net tangible assets (NTA), which means investors can buy $1 of shares for less than $1.
For example, Australian Foundation Investment Co Ltd (ASX: AFI) is trading at a NTA discount of approximately 10%, which is close to the largest discount it has traded at over the past decade.
The increase in the discount means that the dividend yield has increased and may appeal to investors more during 2025, particularly if/when interest rates are cut in Australia next year.
ASX energy shares
Another sector that's hitting 52-week and 15-month lows is the ASX energy share, with names like Woodside Energy Group Ltd (ASX: WDS) and Santos Ltd (ASX: STO) suffering.
It's understandable why energy stocks are down – energy prices have dropped amid a change in the supply and demand dynamic over the last couple of years.
However, global interest rate cuts and the new incoming Republican US administration could lead to an increase in economic demand and help push energy prices higher.
The dividends alone from ASX energy shares could beat the market return in 2025. But if energy prices do rebound, this ASX sector could be near the top of the charts for 2025, rather than the bottom.
