Must read: UK markets, oil, Nationwide, M&A slump

Our head of investment rounds up the action on the eve of a new year.

2022 PERFORMANCE - FTSE 100, FTSE 250, POUND

The FTSE 100 is on track to sharply outperform the FTSE 250 in 2022. The smaller index is broadly flat year-to-date whereas the larger is down by 20%. The FTSE 250 is more closely correlated to the UK economy and has been weighed down by this year’s domestic economic and political uncertainty. The FTSE 100, however, is more of an outward-looking global index that does not reflect the fundamentals of the UK economy. Not only has it outperformed the FTSE 250, but it has also outshined its European equivalents such as the DAX in Germany and the CAC in France thanks to its favourable sectoral mix.

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Oil and mining stocks have staged impressive gains this year with Shell (LSE:SHEL) up by more than 35% year-to-date and Glencore (LSE:GLEN) rallying over 40% driven partly by the war in Ukraine, which sent commodity prices sharply higher. The FTSE 100 has also benefited from the performance of BAE Systems (LSE:BA.), which is up by 55% this year, also on the back of the Russia, Ukraine conflict which has boosted demand for defence spending. Banks such as Standard Chartered (LSE:STAN) have also helped lift the FTSE 100 with the lender up by over 35% year-to-date thanks to the rising interest rate environment which has boosted net interest margins.

Cable (GBPUSD) looks set to end the year down over 10%. The greenback staged strong gains in 2022 and is on track to log its best year since 2015, underpinned by the Federal Reserve’s aggressive rate hiking path. Interest rate differentials have spurred gains for the US dollar but punished other currencies including the pound against it. However, since the end of September, there have been growing expectations that the Fed could start to slow its rate hiking path, as the US inflation figures began to show signs of improvement. This has prompted a turnaround for cable with the US dollar bull run losing steam and the pound regaining strength. GBPUSD has rallied more than 12% off the September lows. Expectations for less hawkish Fed policy has also helped spur gains for equities in the third quarter with the FTSE 100 and FTSE 250 trading significantly higher than their October troughs.

OIL PERFORMANCE THIS YEAR

Oil prices are trading higher and are on track to log their second consecutive annual gain. Brent crude hit a 14-year high of $137 a barrel in March following Russia’s invasion of Ukraine. However since the 2022 peak, oil prices have been mostly trading lower shedding almost 40% across the rest of the year. Concerns about weaker global demand and a particular slowdown from China given its aggressive covid lockdowns have pushed oil prices lower. This year’s dollar strength has also put pressure on oil markets. OPEC+ tried to offset this year’s price decline by agreeing to cut production by two million barrels per day in October. In December, the cartel held off from cutting output further as it waits to assess the impact of slowing Chinese demand and the G7’s price cap on Russian oil. Heading into 2023, severe Covid outbreaks in China and fears of recessions around the world look set to keep a lid on oil demand and prices. However, OPEC+ could intervene to offset any major declines and provide a floor if oil prices fall too aggressively.

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NATIONWIDE

UK December Nationwide Building Society (LSE:NBS) house prices fell by 0.1% month-on-month, better than expectations for a drop of 0.7% and improving versus November’s decline of 1.4%. Year-on-year house prices grew by 2.8% also ahead of forecasts for 2.3% but falling versus November’s reading of +4.4%.

December saw the fourth consecutive month of negative house price growth, the worst run since 2008, driving the annual figure down significantly versus November with all regions suffering a slowdown. East Anglia was the strongest-performing region while Scotland was the weakest. The housing market has been struggling amid pressures from the fallout from the mini-budget, the Bank of England’s rate hiking path, the cost-of-living crisis, and a looming recession. Many potential buyers are holding off from looking for a property for now, hoping that house prices become even cheaper and mortgage rates come down next year.

Shares in the house-builder sector have had a tough year with Taylor Wimpey (LSE:TW.) down over 40%, Barratt Developments (LSE:BDEV) down over 45% and Persimmon (LSE:PSN) down over 55% YTD.

M&A SLUMP

Global M&A posted a record drop in the second half of 2022. According to Refinitiv, $1.4 trillion (£1.1 trillion) of deals were announced between July and December, down from $2.2 trillion in the first half. Deal volumes fell by 38% year-on-year punished by rising inflation and interest rates which made borrowing money and financing deals more expensive. On top of the broad economic slowdown and the general sense of nervousness, which sent equity and bond markets simultaneously sharply dented investor confidence and appetite for mergers and acquisitions.

Wall Street heavyweights such as JPMorgan Chase & Co (NYSE:JPM) and Morgan Stanley (NYSE:MS) posted sharp declines in third-quarter investment banking revenues as a result of the drop in deals and some lenders have taken steps to mitigate this drop. Goldman Sachs (NYSE:GS), for example, has unveiled plans to cut jobs with around 4,000 posts expected to be axed or 8% of its workforce. It is also considering cuts to its bonus pool in a bid to offset the dearth in deals.