These are the ASX share sectors I'd buy and avoid right now

I think some areas of the market are opportunities, while other areas are weak.

| More on:
Business women working from home with stock market chart showing per cent change on her laptop screen.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Different ASX share sectors can offer investment opportunities at different times, depending on profit trends and the wider economy.

The last few years have seen significant volatility, with areas like ASX travel and iron ore shares going through multiple seismic shifts since the onset of COVID-19.

It's common for individual companies to see varying results through an economic cycle – only some businesses are leaders and winners. However, when entire sectors go through booms or slumps, it can attract my attention.

It's not a case of avoiding every business from one industry while every business from another sector is a buy. But, I am closely monitoring the two areas below for different reasons.

Cautious on ASX bank shares

It's no secret that ASX bank shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) rose strongly in 2024.

This was a somewhat strange performance, considering the earnings results of those businesses did not exactly shoot the lights out. For example, in the first quarter of FY25, CBA reported cash net profit after tax (NPAT) was flat year over year. While income increased, the bank's operating expenses grew by 3% because of wage inflation and increased investment spending.

Other banks face a similar picture, with rising expenses and a struggle to grow net income significantly due to the high competition in the sector for loans and deposits.

I think ASX bank shares are now generally trading at an expensive price/earnings (P/E) ratio compared to their historical valuations. The higher the valuation, the lower the margin of safety that we have as investors. Also, higher P/E ratios translate into a lower dividend yield, which reduces the potential future returns.

For example, according to the independent estimates on Commsec, the CBA share price is valued at 24x FY25's estimated earnings with a forecast fully franked dividend yield of 3.2%.

I'm cautious about these high bank valuations because competition could hurt lending margins, and rising arrears could harm net profit, yet P/E ratios are relatively high for these ASX shares.

Contrarian buy on REITs

If I had to choose one sector that could do well in 2025, bearing in mind their starting valuations, I would choose real estate investment trusts (REITs).

High interest rates have been a real headwind for commercial properties. The higher cost of interest rates has hampered rental profits, while property valuations (and share prices) have also been hit.

However, interest rates seem to have peaked and may soon start going down in Australia. Not only could this boost property values, but I also believe it could lead to some of the discount between the share price and net asset value (NAV) per unit closing up as investors begin searching for yield if bonds and savings accounts aren't as attractive.

REITs like Centuria Industrial REIT (ASX: CIP), Charter Hall Long WALE REIT (ASX: CLW), Rural Funds Group (ASX: RFF) and Charter Hall Retail REIT (ASX: CQR) are currently all trading on double-digit price-to-book discounts with large distribution yields. I'm quite optimistic the REIT sector can outperform the S&P/ASX 200 Index (ASX: XJO), particularly if there's at least one RBA rate cut in 2025.

Motley Fool contributor Tristan Harrison has positions in Centuria Industrial REIT and Rural Funds Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Rural Funds Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

A man leans forward over his phone in his hands with a satisfied smirk on his face although he has just learned something pleasing or received some satisfying news.
Technology Shares

Life360 shares: A generational opportunity to get rich?

I think the Life360 share price could more than double again in the year ahead.

Read more »

A woman makes the task of vacuuming fun, leaping while she pretends it is an air guitar.
Opinions

Opinion: This is one of the best ASX growth shares to own for the next 5 years

This stock is rapidly growing, and I’m excited about it.

Read more »

Male and female workers at a steel factory.
Opinions

2 ASX 200 shares that could soar while Donald Trump is US President

These stocks may have a positive future.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Opinions

Prediction: These ASX 200 shares could be among 2025's big winners

These businesses have compelling tailwinds in 2025 and beyond.

Read more »

An older woman high fives an older man with big smiles after seeing good news on their laptop regarding their ASX tech shares
Opinions

If I were in my 50s I'd buy these compelling ASX stocks

I believe these options are appealing for people planning for retirement.

Read more »

A smiling woman at a hardware shop selects paint colours from a wall display.
Opinions

Where will Wesfarmers shares be in 3 years?

Can this business keep impressing the market?

Read more »

A young man goes over his finances and investment portfolio at home.
Dividend Investing

2 ASX dividend stocks I'm thinking about buying in February

I’m considering these shares for passive income.

Read more »

Nervous customer in discussions at a bank.
Bank Shares

Is the ANZ share price a buy? Here's my view

Can investors bank on further gains from ANZ?

Read more »