Right now it is hard to say with any certainty what will be happening in a few months’ time. What we can say with the utmost certainty is that we are experiencing an unprecedented health emergency which has in turn had profound economic consequences. Aside from not going to the office or events, any day-to-day activities like shopping, or travelling, or going out for a drink or a meal have simply stopped, and in economies like ours or the US that are powered by consumer spending the effect is brutal.
UK non-food retail sales slumped by a fifth in March, before the lockdown even began in earnest. We have seen negative oil prices for the first time in history, as planes have been grounded and cars sit idle in driveways. Millions have suddenly found themselves unemployed.
This has raised numerous questions for all investors, not least of which is how long what effectively amounts to a global economic shutdown will last. The answer will largely determine what sort of economic recovery we get – will it be V-shaped, U shaped, Nike Swoosh shaped, or chair shaped? And speculation as to what that shape may be is driving much of we see happening in the markets at the moment.
All of this paints a very confusing picture for investors, especially as markets have not sat still while this has been happening. After the initial panic and the fastest bear market in history, we have seen a significant rebound, not least in the US. Unprecedented government and central bank intervention explains some of this recovery, along with a perhaps overexuberant belief that a way to beat the bug is just around the corner. But it is also worth remembering that there are pockets of strength in US markets, not least its drug and tech industries that look set to be long term winners from possibly permanent changes brought about by Covid-19.
Sadly, the same is not true for many other sectors of the economy, which are facing a much gloomier outlook compared to a time when Covid-19 was the kind of thing that felt like it could only come out of the mind of a thriller writer. Unsurprisingly, lots are now wondering whether the recent strength could merely be the calm before a second storm. Many investors will be looking for shelter right now and wondering how to deal with dividend cuts across many sectors, including companies who have long been viewed as dividend bellwethers.
Shell in fact offers a case in point for just how tough life has become for investors, especially those dependent on equities for income. Alongside Shell, income stalwarts like banks and big retailers like Marks and Spencer have cut or deferred dividends, with cuts forecast to top £50bn by the time the year is out. The question of where to go for income is high on lots of people’s minds, and investment trusts may have the answer.
And with the prospect of another leg downwards at the forefront of people’s minds, others will be looking to preserve what they’ve got, or taking advantage of the sell-off to bargain hunt for oversold gems. Others will be wondering whether to prepare themselves for inflation or deflation – a question the world’s economists will almost certainly fail to answer until it happens. The good news is that investment trusts could hold the key to answering the many dilemma’s investors currently face.