In the summer, I was expecting Lloyds (LSE:LLOY) shares to push above 50p and stay there. But then we had an economic whirlwind in the form of Liz Truss and her disastrous economic policy that sent the market, and banks, tanking.

Like all banks, this FTSE 100 stalwart is facing headwinds, but there is also one major tailwind. So let’s take a closer look at Lloyds’ fortunes and see whether this blue-chip stock is right for my portfolio.

Headwinds

Let’s start with the headwinds. In late October, the bank said pre-tax profit for Q3 fell 26% to £1.5bn. Impairment charges soared to £668m from a release of £119m a year ago. This large debt provision is hopefully not going to be entirely necessary, but it does speak volumes about the perceived health of the UK economy.

There are recessionary forecasts for the UK economy, as with much of Europe. And recessions aren’t good for credit quality. However, it’s worth noting the UK economy has surprised us before. Plus falling gas and fuel prices could play an important role in slowing inflation.

Tailwinds

Interest rates have been increasing throughout 2022. It’s likely that the Bank of England will continue increasing the base rate through to 2023. In fact, some analysts see the base rate hitting 4% in 2023.

As such, net interest margins (NIMs) — the difference between savings and lending rates — are rising considerably. In its Q3 update, Lloyds said it expects its NIM to be above 2.9%, up from 2.8%. Lloyds is even earning more interest on the money it leaves with the central bank.

Lloyds trades at a fraction of its pre-2008 crash price. There are several reasons for this, but a major one is more than a decade of near-zero interest rates. Now, with rates increasing to levels not seen since the noughties, income is soaring. Despite the impairment charges, net income in Q3 rose 12% to £13bn on the back of surging interest rates.

This is clearly positive. It provides the bank with the ability to absorb sizeable impairment charges in the short term. But, in the long run, it should provide Lloyds with more capital to invest in new projects. For example, Lloyds is planning to enter the UK rental market by buying as many as 50,000 homes over the next decade. It’s definitely a project that interests me.

Why I’m buying more Lloyds stock

I already own Lloyds shares but, at 42p, I see now as a good time for me to buy more. Despite the immediate headwinds, I’m confident higher interest rates will translate into greater returns for shareholders in the medium-to-long term.

It’s certainly not expensive either, with a price-to-earning ratio of 5.6 — that’s substantially under the index average. And despite dividend payments being depressed on a historical basis, the yield is currently a healthy 4.75%. That’s certainly attractive and, with coverage at 3.75 last year, sustainable.

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James Fox has positions in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Dividend stocks form an important part of my portfolio. They provide me with regular income in the form of dividend payments. This passive income source is the holy grail for many investors, particularly those investing over the long run.

UK indexes have fallen over the past two months, particularly after Liz Truss spooked markets with her catastrophic fiscal policy. Both the FTSE 100 and FTSE 250 are down considerably from summer highs. And when share prices fall, dividend yields go up — unless the company reduces dividend payments.

There’s obviously concern that we’re entering a recessionary environment and there will be further negative pressure on stocks. But, for me, these two stocks look well positioned to outperform the market and provide me with passive income.

Vistry Group

I think housebuilder stocks have fallen far enough. Vistry (LSE:VTY) grew impressively in 2021, with revenue coming in at £2.3bn, more than double any year before the pandemic.

And this growth has continued in 2022. Adjusted revenues in the six months to 30 June rose nearly 6% to £1.33bn, while total completions improved 5% to 5,409. Adjusted operating profits were ahead 13% at £198.2m.

However, with the economic climate worsening, and interest rates being hiked, the share price has tanked. In fact, Vistry is down 50% over one year. That’s huge, but in line with other housebuilders.

The issue is that analysts contend house prices will remain flat while cost inflation will run at 5%. That’s clearly an issue and it’s likely to impact housebuilders right through 2023.

But in the long run, I’m confident demand will return. And after a bumper two years, housebuilders should have the resources to see these troubled times through. Vistry has a debt to total capital ratio of 12.5% — a lower figure than the previous year’s 14.6% — and a net profit margin of 9%.

The stock, which is also the target for a proposed merger with Countryside Partnerships, also offers an attractive 10% yield. With 2022 still expected to be a record year, I anticipate the yield to remain constant for the time being. I already own Vistry shares, but I’m buying more.

Direct Line

Direct Line (LSE:DLG) posted a 31.8% decline in first-half pre-tax profit in H1 as it took a hit from claims inflation. Pre-tax profit fell to £178.1m from £261.3m in the first half a year earlier, although this was ahead of consensus expectations of £155m.

As a result of the above, the insurer is now down 31% over the year. However, I see this dip as an opportunity to add this stock to my portfolio. Regardless of a possible recession, people will still need or want to insure their homes and vehicles.

And this is something the business has highlighted. The group contends that its fundamentals remain strong and that through steps taken within its garage network, as well as pushing up prices, Direct Line has returned to writing at target margins “based on latest claims assumptions“.

I’m buying Direct Line because of these defensive qualities, but also its sizeable 11% yield. Even if payments are cut, proportional to the decline in H1 profits, it will still remain above the index average.

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James Fox has positions in Vistry. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Some analysts are warning of more stock market turmoil. They’re suggesting Rishi Sunak’s policies could make a forecast recession deeper. This might not be my forecast. But, as an investor, I want to ensure my portfolio is prepared for several economic outcomes.

A new era of austerity?

Thomas Pugh at City group RSM said the new prime minister’s pledge for fiscal responsibility suggests the country could be facing a fresh wave of austerity.

The reversal of Liz Truss’s catastrophic fiscal policy could result in companies and individuals further reducing their economic activity and may induce a deeper recession than expected. Combine this with a cost-of-living crisis, and many companies may struggle.

There are counter arguments to this. Fiscal responsibility should bring down inflation and there’ll be less need to continually raise interest rates — higher rates mean higher mortgage repayments.

While my portfolio contains stocks like Lloyds, which is unlikely to perform well in a recession, I’m also looking at defensive stocks to hedge my position.

Defensive pick 1

Unilever (LSE:ULVR) is among my top picks and I’ve recently added it to my portfolio. The fast-moving consumer goods giant sells in 190 countries and claims that 3.4bn people use its products every day. Unilever has defensive qualities because of the strength of the brands it owns, such as Hellmann’s, Marmite, Heinz, Persil, and Lifebuoy.

When times are tough, customers still tend to buy branded goods. And this is why Unilever is likely to outperform the market in downturns. This has already been demonstrated in 2022, with the firm lifting prices and passing costs on to customers. In its H1 results, Unilever said it hiked its prices by 9.8% versus the same period in 2021, only resulting in a small fall in sales volumes.

Unilever also earns most of its income overseas and, with a weak pound, this should be a positive. Some 58% of its income comes from emerging markets, while approximately 17% of its revenues are derived from the US.

A deep recession is never good for spending, but Unilever still looks a strong pick for me. I already own shares in Unilever, but I’m looking to buy more.

Defensive pick 2

Diageo (LSE:DGE) is another company with similar characteristics. The firm has defensive qualities, selling brands such as Johnnie Walker, Guinness, Baileys, and Smirnoff. As noted, well-known brands tend to do well, even when pockets get squeezed. 

Moreover, a large proportion of its sales are made in the US, and it’s growing considerably in developing economies. More than a third of the firm’s sales come from North America. The figure, $6bn, is around double the company’s earnings in Europe.

I don’t have a position in Diageo, but with some analysts predicting a deeper recession, this stock could help me manage risk. As such, it’s a stock that I’m intending to buy.

It’s not particularly cheap, with a price-to-earnings ratio of 23. But that reflects growth prospects in developing markets, as well as the current demand for defensive stocks.

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James Fox has positions in Unilever. The Motley Fool UK has recommended Diageo and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Shell (LSE:SHEL) shares rallied this week after better-than-expected Q3 results. The hydrocarbons giant has performed extraordinarily well this year, with earlier quarters setting records as oil and gas prices surged.

In fact, the FTSE 100 heavyweight is up 29% over the 12 months. The stock soared this year on the back of rising oil and gas prices — largely resulting from the disruption caused by Russia’s invasion of Ukraine. Moreover, margins have been pretty good in the downstream and retail parts of the business too.

Happy shareholders

Many analysts didn’t expect oil companies to come back so strongly after the pandemic when crude prices had temporarily turned negative. In fact, if I had bought Shell shares two years ago, I would now have seen 143% growth. The returns have been massive and the dividend yield has moved from around 4.5% to just over 3%.

Can this bull run continue?

Shell’s profitability is largely dependent on the prices it can obtain for hydrocarbon products. But it operates in a cyclical industry. This means that when demand is strong and prices are high, the company’s margins can soar. However, when economic activity is waning around the world — as it is now — demand for oil and gas products falls, along with the price.

On Thursday, Shell reported operating profits of $9.5bn for the third quarter of 2022, lower than the three months before, but still more than double the same period in 2021. Shell had originally been forecast to report net earnings of $10.5bn in the third quarter. However, the business warned earlier in the month about the impact of waning gas prices.

Currently, Shell is trading near its 52-week high. But, for me, that’s a concern. While performance has been excellent this year, the global economy is starting to turn. Growth in all major economies, including China, the US, the UK and the EU, is sluggish, with recessions forecast across the board.

We’ve already seen oil production cut by OPEC, but crude prices are down 25% from summer highs. Natural gas prices have fallen further. Earlier this week, European gas prices fell below €100 per megawatt hour for the first time since June. Prices in the UK dropped to 180p per therm on Monday, down 72% from its peak.

I’m not buying yet

I’m actually pretty bullish on oil and gas in the long run. The reason is that I believe we’re entering an era of enhanced competition for resources and this, in general, will push prices upwards.

However, I’m not buying Shell shares now because I think there will be better entry points later in the year. I believe that lower economic activity around the world will push hydrocarbons prices, and Shell’s margins, down.

As such, I’m holding off on buying Shell shares until the share price cools.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The FTSE 100 and FTSE 250 tanked in September after the British government announced some heavily-criticised fiscal policies. It’s fair to say that Liz Truss and her chancellor, Kwasi Kwarteng, well and truly spooked markets.

But now Rishi Sunak is in office and has been promising stability. So why is the FTSE still down? And what should I be doing?

What spooked markets?

Kwarteng’s mini-budget in September was not what the markets wanted to hear. Even the International Monetary Fund (IMF) criticised the UK government’s tax plan, warning that the measures will add to inflation and increase inequality. 

The ex-chancellor’s unfunded tax cuts and spending plans would have required more international borrowing and the news sent the pound falling to its worst position against the dollar in decades.

With interest rates poised to be hiked even higher, the FTSE 100 fell from highs above 7,500 in August to lows of 6,800. The FTSE 250 fell from well over 20,000 to under 17,000.

Positive signs

Now Sunak is in office and it appears that stability is his core objective. While the budget will have to wait until mid-November, we know he’s intent on balancing the books and not creating debts for future generations. This means less international borrowing, and UK government bonds are already looking less risky.

We’ll have to see what’s in the budget but, let’s face it, it’s going to be better for markets than Kwarteng’s September statement.

But there is also the matter of natural gas prices. Commodities are at the centre of this global economic crisis, contributing both directly and indirectly to inflation. But natural gas prices have been falling over the past three months and, on Tuesday, dropped below €100 per megawatt hour for the first time since 14 June. Prices in the UK dropped to 180p per therm on Monday, down 72% from their peak. It’s also worth noting that gas storage facilities in Europe are almost full.

This is certainly good news. Firstly, sustained lower gas prices will reduce inflation both directly and indirectly. But, secondly, it could mean the government’s pledge (or new targeted pledge) for a household energy cap would cost a lot less. ING said that, if prices remained the same, keeping the energy cap in place for two years would cost around £50bn – significantly below estimates of £140bn in August when prices first spiked.

But with these positive signs, why isn’t the market soaring? Well, it may take some time for investor confidence to return.

What am I doing?

I’m not a perennial bull, but I see now as good time to buy. Despite recession concerns, I’m still looking at banks. Higher interest rates are pushing margins up. Banks, such as Lloyds, tanked under Truss. The Bank of England hiked rates in response to Kwarteng’s inflationary budget and this caused banks to remove lending products.

But with Sunak in charge, and what we expect to be a less inflationary fiscal policy, I’m expecting the banking sector to perform much better.

I’m also looking at air travel, like IAG. With demand remaining strong, and fuel prices falling, the outlook could be improving for the sector.

I already own shares in IAG and Lloyds, but I’m looking to purchase more.

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James Fox has positions in International Consolidated Airlines Group SA and Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

There’s no shortage of ‘cheap shares’ right now — at least on face value. The market has been well and truly spooked by Liz Truss and her short stay in office. The FTSE 100 and FTSE 250 had a torrid time during the short tenure.

The market is likely to improve on Rishi Sunak’s accession to PM. After all, he seems much more fiscally responsible, and that’s what the market wants to see.

But with both indexes down considerably, I’m looking for cheap stocks to add to my portfolio before November starts.

Hargreaves Lansdown

Hargreaves Lansdown (LSE:HL) shares have been on a downward track over the past 12 months. In fact, they’re down 52%. The investment supermarket saw its share price soar during the pandemic as Britons increasingly turned to investing. After all, there wasn’t much else to do.

However, as was arguably predictable, Hargreaves wasn’t able to continue growing at such a rate following the pandemic. But considering the current economic environment — with a cost-of-living crisis — I don’t think the firm is performing too poorly.

A trading update on 17 October highlighted the firm brought in net new business of £700m in the quarter to 30 September, with assets under administration reaching £122.7bn.

In the long run, I think there are several reasons to be positive about this stock. As many as 1 in 10 people started investing during the pandemic and more and more investors look to take charge of their own investments. As the UK’s largest investment platform, with 1.7 million users, Hargreaves stands to benefit.

I already own Hargreaves shares, but with the share price near its lowest in 10 years, and a 5.7% dividend yield, I’d buy more.

Barclays

Barclays (LSE:BARC) is an unloved British banking share. It’s a giant of the banking world, but it’s largely seen as unexciting. And 2022 hasn’t exactly gone to plan. While other banks performed well on higher interest rates, in July, Barclays reported a fall in pre-tax profits. This was due to a £1.9bn charge to cover the cost of buying back securities it sold in error.

The stock is currently down 26% over the course of the year. But there are some very positive fundamentals. Barclays has already put aside £300m for bad debts induced by inflation, but higher interest rates are pushing up margins.

Banks have already seen margins increase, but with Bank of England interest rates set to near 6% next year, net interest margins (NIMs) will soar. Recessions certainly aren’t good for credit quality, but higher NIMs should more than make up for it.

Moreover, the bank earns around a third of its revenue from the US. And with the pound weak, dollar-dominated income will be inflated when converted into GBP. Once again, I already own Barclays shares, and despite a poor year so far, I’d buy more shares while it trades at around 150p.

There’s also the matter of a 4% dividend yield. It’s not groundbreaking, but it’s certainly good to have.

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James Fox has positions in Barclays and Hargreaves Lansdown. The Motley Fool UK has recommended Barclays and Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Following the recent volatility, which has largely pushed shares downwards, I’ve been on the lookout for stocks to buy. There’s good reason for this. Having hovered around 7,500 for much of August, the FTSE 100 fell as low as 6,800 this month. As a result, there’s a host of quality stocks trading at knockdown prices.

The return of stability

I take long positions when investing but, like many others, I was a concerned with damage-limitation before and during Liz Truss’s premiership. A host of arguably reckless fiscal policies sent the markets into freefall.

But now things are looking more stable, although the markets haven’t recovered. Rishi Sunak’s rhetoric suggests a much more responsible fiscal policy, which will result in less government borrowing and, hopefully, less need for the Bank of England (BoE) to hike interest rates.

While we will have to wait a few weeks for the budget, it looks like the market will remain fairly stable, albeit at a depressed rate, until we know exactly what the government’s plans are.

Big winners

Banks tanked in September and October after the mini-budget spooked markets and rumours suggested Truss was looking to use quantitative easing to avert a £10bn payout to banks. And then there were concerns that the BoE would need to hike interest rates even higher following the inflationary budget. As rates rose, some banks took lending products off the market.

But now, the medium-term future for banks appears to be in a much more stable. There are still concerns about recession and the impact this will have on credit quality. However, interest rates are likely to remain high, but will unlikely grow at a rate that is prohibitive to lending.

Higher rates mean higher Net Interest Margins (NIMs). This is a big deal for banks. For over a decade we’ve had near-zero base rates.

I’m looking to add more HSBC shares to my portfolio. It’s trading near its 52-week low, and despite concerns about the macroeconomic environment, it’s recently outperformed analysts’ predictions. The bank posted a pre-tax profit of $3.15bn for the three months to 30 September, down from $5.4bn last year, but above the $2.45bn consensus analysts estimated.

The bank also has a handsome dividend yield of 4.3% and trades with a price-to-earnings (P/E) ratio of eight. It’s more expensive than Lloyds — which I also like right now — but it’s more diversified, increasingly focusing on high growth markets in the Far East.

Housebuilders are arguably up against it right now, but with Truss’s premiership over, things are looking a lot more rosy. Cost inflation is set to be 5% next year while house prices are expected to remain flat. That’s clearly not good news, but housebuilder stocks are down massively.

Crest Nicholson is a top pick for my portfolio. The property developer had a year’s worth of profits wiped out by the cladding crisis. It’s now trading 44% down over 12 months and down 65% over five years. And I think it’s now starting to look cheap. It has a P/E ratio of just 5.9 and I think its focus on higher-end housing in the south of England will likely insulate it from demand-related challenges.

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James Fox has positions in Crest Nicholson, HSBC Holdings and Lloyds Banking Group. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

UK shares form the bulk of my portfolio. And right now, despite concerns about the health of the UK economy in the near term, I feel incentivised to buy UK shares. So how much of my portfolio should be invested in UK shares? Let’s take a look.

Home country bias

Hargreaves Lansdown recently published an article looking at home country bias and what it means for investors. The phenomenon, which isn’t limited to the confines of the UK or US, describes a situation in which people have too much invested in domestic shares within their portfolios.

This happens because investors feel more comfortable dealing in an economy they know well and companies in which they are familiar. In some cases, investors may even feel like they have first-hand experiential data on how well a company is doing — maybe all my friends have started using a delivery app.

Why investing at home can be a good strategy

I always do my research before investing in a company. And that research can be a little bit easier if I’m familiar with the economic context these companies operate in. So it could be easier to make a thoroughly informed investment decision in my home country.

There is also the matter of exchange rates. And this is particularly important. If I were to invest in US stocks now, with the pound worth only $1.13, I’d be concerned that an appreciation of the pound could wipe out all my gains.

A year ago, the pound was worth around $1.35-$1.40. If I were to invest now, and the pound were to regain to previous levels, I could lose as much 20% of my investment value. So this is certainly something putting me off investing in dollar-denominated stocks right now.

Diversity is important

The FTSE 100 and FTSE 250 are among the worst performing global markets in recent months. In fact, if I were entirely exposed to UK stocks, my portfolio would have likely suffered even more than it did.

Thankfully, my non-UK stocks actually did rather well during that period. With the pound tanking, my USD-denominated investments soared in relative terms.

The FTSE also doesn’t offer me a huge amount of exposure to fast-developing sectors such as green technologies. Instead, the index is heavier on banking and resources. As such, investing in Nasdaq-listed tech stocks provides me with this exposure, and helps diversify my portfolio.

Here’s what I’m doing

Personally, I’m finding it tough to invest in US stocks right now given the weakness of the pound, unless I can find exceptionally cheap stocks. NIO is one such stock. The Chinese electric vehicle (EV) maker is down 40% over the month (74% over the year). As a long-term investor, I see now as a good time to buy this highly promising EV manufacturer.

So, for the moment, my portfolio is staying largely UK focused. And I plan on keeping it that way, with around 60% of my portfolio invested in UK stocks.

Despite concerns around the UK economy, there are incentives for investing in the FTSE 100. The index is full of companies that operate globally — 70% of index revenue comes from overseas. Plus, there are some sizeable dividend yields out there, and I don’t have to worry too much about exchange rate fluctuations.

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James Fox has positions in Hargreaves Lansdown and Nio Inc. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Income stocks are the basis of my portfolio. They provide me with regular sources of income through dividend payments that I receive at intervals throughout the year.

Right now is certainly an interesting time to be investing in income stocks. That’s because dividend yields, on the whole, are getting larger.

Some companies, including those explored below, are coming off the back of strong years, but there are concerns about the macroeconomic environment in the coming months.

So, with dividend payments remaining constant or rising and share prices falling, yields have risen. However, big yields can be a warning sign. So, can these stocks maintain their big yields or should I stay clear?

The biggest yield on the FTSE 100

Persimmon (LSE:PSN) has the highest dividend yield on the FTSE 100 — around 20%. That means it would only take five years to get my investment back assuming the dividend yield remained the same in the coming years.

But there are some dark clouds surrounding the housebuilding sector. Interest rates are rising and prices appear to have peaked. This isn’t positive when cost inflation is running at 5%.

However, I feel that these issues are more than priced in. In fact, Persimmon is trading near its lowest point in eight years despite having a stellar 2021 and H1 of 2022. And long-term demand for housing in the UK is likely to remain strong. After all, there is an acute shortage.

There’s also the matter of the fire safety pledge. While some housebuilders are losing a year’s worth of profits to recladding houses, Persimmon’s spend is only equivalent to 10% of 2021 income.

I already own Persimmon stock, and it hasn’t been good to me, but trading below 1,300p, I’d buy more. The dividend forecast for 2023 is 225p, down only 10p from 2022. But even if the dividend were halved, I still see this as a good return and far above the index average.

A big yielding bank

A 7% yield might sound small compared to Persimmon, but it’s still an excellent return on my investment. Close Brothers Group (LSE:CBG) provides securities trading, lending, deposit-taking, and wealth-management services. 

The FTSE 250 firm is currently trading at its lowest point in nearly 10 years. However, the firm has strong margins — around 7.8% — and as noted by RBC, has defensive qualities. And with interest rates rising, you’d expect the bank to be able to expand margins further, but that can work two ways.

Naturally, a deep recession and much higher interest rates may dampen demand for its services. And that wouldn’t be good for business. However, hopefully, especially with a more fiscally responsible prime minister at the helm, we can expect less turmoil.

Once again, I already own Close Brothers Group shares. But as the shares are trading under 1,000p for the first time in nine years, I’d buy more today.

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James Fox has positions in Close Brothers Group and Persimmon. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A host of FTSE 100 shares have underperformed this year. And energy and commodity prices are a core reason for this. For much of the year, the index was hoisted upwards by surging energy stocks, including BP and Shell, while other industries reported falling margins as oil and gas prices soared.

However, over the past two months, oil and gas prices have been falling. In fact, their declines were largely unreported until earlier this week when European gas prices dropped below €100 per megawatt hour for the first time since 14 June. Meanwhile, prices in the UK dropped to 180p per therm on Monday, down 72% from their peak.

Gas prices are still ahead of where they were before Russia’s invasion of Ukraine, but the decline since the summer has been significant — further downward pressure on resources is expected in 2023. Oil prices are broadly in line with where they were for much for 2021.

Sectors set to gain

Falling oil and gas prices tend to benefit sectors like paints, retail, petrochemicals, textiles, aviation, tyres, and cement. In many cases, the impact can be very direct. Higher gas prices push up utilities costs for retailer and restaurants, among others, putting negative pressure on margins.

But there are also indirect ways in which higher energy prices can push up costs across multiple industries. Taking the restaurant industry again, higher gas prices mean higher fertiliser costs, which pushes up crop prices and eventually meat prices. Restaurants are either forced to swallow the costs or pass them on to customers, risking damaging demand.

Aviation pick

Jet fuel prices are down from their highs in the summer, albeit above previous years. But the general downward movement on fuel prices are positive. And this is occurring at a time when demand for travel is robust.

IAG (LSE:IAG) is one stock that I’m looking to buy more of. Earlier this month, the Iberia and British Airways owner said it now expects to report a third-quarter operating profit of around €1.2bn after stronger-than-expected trading.

“Forward bookings remain at expected levels for the time of year, with no indication of weakness“, the firm announced.

Amid a cost-of-living crisis, I believe the firm’s capacity to pass increasing costs onto customers is impressive. The firm has a fuel hedging strategy — 70% for the first quarter of 2022 and 60% for fiscal year 2022 — but that still leave 40% to be passed on.

Supermarket pick

Food stores are some of the biggest energy users in the country. With aisles packed full of energy-burning fridges and freezers, supermarkets are forced to internalise fuel costs or pass them on to customers.

Sainsbury’s (LSE:SBRY) is a stock I’m looking to buy. It’s actually the only supermarket with a store run entirely off-grid. But that’s besides the point, lower energy prices should be a big benefit for Sainsbury’s and its near 1,500 stores.

The group has also been successful in moving business online. Internet sales at Sainsbury’s were up 94% versus pre-pandemic levels during the 16 weeks to 25 June. And this is an important move in light of trends pushing retail online.

There are still headwinds for the sector as Britons reduce their household spending. But down 35% over the year, the current entry point, around 190p, looks attractive to me.

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James Fox has positions in IAG. The Motley Fool UK has recommended Sainsbury (J). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.