Scottish Mortgage Investment Trust (LSE: SMT) shares have fallen a whopping 36% so far in 2022. The main reason for the drop is rising inflation and subsequent interest rate hikes, which have weighed on stock market valuations. Over a 12-month period, the situation looks even bleaker, with the shares falling just under 40% in value. With inflation still on the rise, is now the time to buy this stock? Let’s find out.

A rocky road

Red hot inflation has been a key market trend in 2022. With UK inflation reaching 10.1% in July and predicted to rise to over 18% by January, the situation looks pretty grim. Interest rates have been hiked to 1.75% in the UK in an effort to curb rising prices. This is putting severe pressure on growth stock valuations, which is very bad news for Scottish Mortgage. This is because the trust’s holdings are primarily focused on exactly this type of asset.

For example, the trust’s top three holdings are Moderna (8.3%), Tesla (6.7%), and ASML (6.6%). All of these stocks fit into the high-growth stock category and have exhibited high volatility so far in 2022. As interest rates continue to rise, and markets become increasingly uncertain, Scottish Mortgage shares could be in for an ongoing bumpy ride.

Another reason why the shares have suffered is pressure from Chinese regulatory authorities on US-listed Chinese companies. This has sparked the threat of potential delisting, which has vastly reduced investor confidence. Companies like NIO (which makes up 2.9% of Scottish Mortgages portfolio) have seen their shares tank on the potential of being delisted from the NYSE.

Reasons I like the stock

So why do I like the trust? For starters, at 829p, the shares are much cheaper than they were a year ago. In addition to the lower price, I adopt a longer-term outlook when looking at shares. Baillie Giffords’s flagship trust looks to “add value over five-year time frames, preferably much longer”. So, maybe I should discount the upcoming short-term volatility and look further into the future. Although past returns are no indication of future performance, Scottish Mortgage’s 606% 10-year return – compared to a 231% return for its benchmark the FTSE All World Index – highlights the stellar management of the trust.

In addition to this, being an investment trust, it allows me access to a bundle of assets in different industries, all under one investment. This is great for reducing my portfolio’s risk level. It also allows me access to non-listed companies, like Elon Musk’s SpaceX, in which Scottish Mortgage owns a £430m stake.

Am I buying?

I think that in the short term, Scottish Mortgage shares could face more volatility. However, here at The Motley Fool, we’re long-term investors. I think that under £9, the investment trust shares could land me some healthy returns over a broader time horizon – say 10 years. For that reason, I’m seriously considering adding this stock to my portfolio at today’s price.

The post Scottish Mortgage shares are down 36%: should I buy now? appeared first on The Twelfth Magpie.

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• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding and Tesla. 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 story so far

To understand why the stock has fallen, we must cast our minds back to the height of the Covid-19 pandemic. In an effort to remedy the economic shutdown, central banks across the world poured billions into economies to keep them afloat. At the same time, the virus disrupted supply chains. This meant there was less supply, but people had more money (on a macro scale) to spend on the same goods. The result of this – rising prices.

Fast forward to 2022, and inflation has been reaching sky-high levels. To make things worse, the tragic Russia-Ukraine crisis has sent energy prices soaring, adding to inflationary pressures. Now central banks are faced with a new task: to slow down rising prices. They do this by increasing interest rates.

When interest rates increase, investors withdraw their money from higher-risk, speculative assets like growth stocks, and put them into safer assets. This is because they can earn a better risk-free rate. Interest rates in the UK and US have been on the rise recently, the former sitting at 1.75%.

Scottish Mortgage’s main holdings are exactly the type of stocks that are being negatively affected by this kind of market. For example, its top two holdings Moderna (8.3%) and Tesla (6.7%) have fallen 39% and 28% so far in 2022. Many analysts are predicting inflation to keep rising, which likely means that rates will too. If this does happen, it would be bad news for Scottish Mortgage shares.

A long-term play

Here at The Motley Fool, we are long-term investors. That means picking quality stocks and holding them for up to 10 years. Scottish Mortgage operates with the same thesis. It looks to “add value over five-year time frames, preferably much longer” and explicitly states that it doesn’t “add much more than anyone else in the short term”. So, perhaps I should be discounting the current volatility, and be operating with more of a long-term view, trusting the fund’s management.

I only have to check on the trust’s previous returns to see this management in action. Over the last five years it has returned 118%, and over the last 10 years, a whopping 606%. This vastly outperforms the FTSE All World Index, which is the stock’s benchmark.

Am I buying?

I’m not buying just yet though. I think in today’s macro climate, a growth-focused trust is too risky for me. However, I will be keeping this stock on my watch list as I think it could have the potential to yield some big returns over a 10-year span.

The post Are Scottish Mortgage shares a bargain at 822p?             appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

However, last week the shares experienced an encouraging 5% jump in value. Currently sitting at 774p per share, down almost 50% from its all-time high, is now the time for me to add Scottish Mortgage stock to my portfolio?

Why the trust has underperformed

The main reason why Scottish Mortgage shares have underperformed this year is the nature of the stocks it holds. The trust targets high-growth companies and aims to hold them for a minimum of five years to generate healthy returns. This strategy has worked well in the past, highlighted by an impressive 585% increase in the share price over this period.

However, 2022 has been characterised by rising inflation and interest rates. Rising rates put big pressure on the valuation of growth stocks, which soared in 2020 and 2021. This has caused investors to pull out of growth stocks and pour into safer value stocks. The performance of Scottish Mortgage’s top holdings has taken a hit accordingly. For example, Tesla (5.7%), NVIDIA (2.5%), and Tencent (5%) are down 37%, 47%, and 21% year to date. Although Tesla is up 9% over the past 12 months, Nvidia and Tencent are down 22%, and 34% respectively.

A buying opportunity?

2022 has proved a tough year so far for Scottish Mortgage shares. However, this volatility may only be a flash in the pan in the long run. As mentioned, the trust looks for value over a minimum five-year period – preferably longer – and its healthy past returns show the exceptional execution of this thesis. Therefore, perhaps I should be discounting the current volatility and adopting a broader outlook?

This situation seems especially prevalent in China, where Scottish Mortgage has about one-fifth of its holdings. Recently, Chinese stocks listed in the US have taken a hit due to tough regulatory rules. However, China is still a rapidly-growing economy, and having such a large stake in this growth could pay dividends in the long run.

Another positive about the fund is that it gives me access to a wide portfolio of companies all under one investment. In addition to this, I also get access to unlisted companies, like SpaceX, in which the trust holds a large position.

What I am doing now

Overall, I think that at 774p, Scottish Mortgage stock could be a great addition to my portfolio. Yes, there’s some short-term volatility that has beaten down the share price, but in my eyes, this offers me a chance to grab shares at a discount. The diversification and access to unlisted companies are big pluses too. Therefore, I’m seriously considering adding a position to my portfolio soon.

The post Are Scottish Mortgage shares good buys at 774p? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

Scottish Mortgage Investment Trust (LSE: SMT) shares have performed poorly so far in 2022. They are down 46% year to date, and over the last 12 months, they have fallen 43%. The main reason for the fall is rising interest rates, which were raised by the US and UK central banks on Wednesday to control inflation. The Scottish Mortgage share price slumped 8% on the news.

Reasons for the share price fall

The Federal Reserve announced yesterday that it is hiking interest rates by 0.75% to a range of 1.5% to 1.75%. The Bank of England announced a similar rise in rates to 1.25%. These hikes have been made in an effort to control record inflation levels. When interest rates go up, investors can earn higher returns on safe assets, and hence they turn away from high-growth stocks.

The bad news is that Scottish Mortgage Investment Trust holds exactly the type of assets that people tend to sell during this kind of market volatility. For example, the fund’s top three holdings as of the end of May were Moderna (7.4%), ASML (6.7%), and Tesla (5.7%). All of these stocks have fallen over 5% on news of rates being hiked.

The Fed predicts that rates could climb as high as 3.4% by end of 2022. If this is the case, then I expect Scottish Mortgage shares to struggle to gain any momentum throughout the rest of the year.

The investment trust’s performance has also been tainted by strict Chinese regulations. Since late 2020, the Chinese government has been cracking down on the tech sector in an attempt to curb the monopolistic power of some of its biggest firms. Scottish Mortgage had been building up positions in many of these companies. It announced in its annual report that this strategy was likely a mistake.

Long-term vision

Interest rates and Chinese regulation do pose serious short-term threats to Scottish Mortgage shares. However, the trust’s investment strategy looks to “add value over five-year time frames, preferably longer”. This means finding quality growth companies and investing in them with a long-term outlook. The fund’s performance backs up this methodology, generating 150% returns over the past five years. Past performance is no indication of future returns; however, this does highlight the fund’s exceptional management.

Therefore, perhaps I shouldn’t be worried about short-term volatility and take more of a long-term outlook on the shares. What’s more, growth stocks are starting to fall back from the sky-high valuations seen in 2021. The trust could start to pick up some shares at bargain prices, leading to high growth in years to come.

Would I buy the shares?

Overall, I think that Scottish Mortgage shares could fall lower over the next few months. Both the Bank of England and the Fed have predicted more rate hikes, and I think this will push growth stock valuations lower. Therefore, I won’t be buying the stock today but will be keeping it on my watchlist.

The post Here’s why Scottish Mortgage shares fell 8% yesterday appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding and Tesla. 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.

Declines are difficult to bear

Seeing a company’s share price plunge deep into the red is never a pretty sight. Unfortunately, the trust’s investors had to bear with losses of up to 45% at one point. So, what’s behind the monumental drop in share price? Well, the Scottish Mortgage portfolio holds an abundance of growth names. The top 10 holdings alone have an average price-to-earnings (P/E) ratio of 37, which is more than twice the S&P 500‘s P/E ratio of 16.

Growth stocks suffer the most when interest rates rise, as has been the case due to sky-high inflation. As a result, spending is expected to decrease due to higher borrowing costs. As growth stocks get their valuations from future cash flows, a slowdown in future spending slashes their valuations.

To make matters worse, China’s zero-Covid policy has led to several lockdowns in big cities. These lockdowns have had an impact on several of the FTSE 100 trust’s top Chinese holdings. Consequently, the Scottish Mortgage share price has suffered a decline from its biggest investments.

Trust and hope

That being said, Scottish Mortgage saw its share price rebound last week. This was down to a generally positive set of US economic data. Consumer spending figures were rather upbeat, and minutes released from the Fed meeting eased fears of a 0.75% rate hike. But most importantly, the core price consumption expenditure (PCE), the Fed’s preferred index for measuring inflation, pointed towards inflation peaking in April. This led to one Fed official suggesting that the central bank could even pause rate hikes in September. Officials from China also mentioned plans of lifting lockdowns which sent many of the portfolio’s Chinese stocks rallying, positively impacting SMT shares.

Unstable foundations

While Scottish Mortgage shares present a tremendous amount of upside, it also comes with plenty of risks. Since its remarkable one-week recovery, oil prices have shot back up to the $120 per barrel mark. Given that the main cause of inflation has been high oil prices, an EU ban on Russian oil imports, along with the reopening of the Chinese economy, isn’t going to drive inflation down anytime soon.

Moreover, although China has began lifting its lockdowns, there’s no certainty that a similar episode won’t happen again in the future. Therefore, I’m doubtful that the fund is completely out of the woods for a turnaround. The Chinese government’s ability to manipulate share prices of its local companies also presents too big of a risk to me. Thus, I won’t be looking to invest in SMT shares anytime soon. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more stability.

The post Could the Scottish Mortgage share price be about to turn around? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

John Choong has no position in any of the shares mentioned at the time of writing. 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 trust had a knockout 2020, rising over 106% for the year. In fact, over the past 10 years, it has generated a monster 617% return. This has solidified it as one of the UK’s leading listed trusts. So, with the shares seemingly back on the rise, is now the time for me to buy in? Let’s investigate.

Why the Scottish Mortgage share price appeals to me

The primary reason why I like the look of the shares is the fact that they allow me access to a bunch of high-growth companies all in one investment. The fund’s top 10 holdings include Tesla (5.3%), Tencent (4.7%) and Nvidia (3.1%), all high-growth tech-focused firms.

While this helps me diversify my portfolio, it also gives me peace of mind knowing my shares will be actively managed. If the 617% 10-year returns aren’t evidence of this stellar management, then I don’t know what is. For more context, over this period, the shares have outperformed the FTSE All World Index by almost 400%.

In addition to this bundle of listed companies, Scottish Mortgage also gives me access to privately held firms such as Northvolt, a Swedish-based battery cell manufacturer, and ByteDance, owner of the popular social media app TikTok. Retail investors currently cannot gain access to these firms’ high growth, but holding Scottish Mortgage shares would allow me to.

Not out of the woods yet

While the Scottish Mortgage share price does look attractive to me, there are still a number of risks that could impact the trust’s performance.

Firstly, the global macroeconomic outlook seems to be pitted against the trust. Scottish Mortgage has a very high weighting to tech stocks. This is part of the reason why the shares generated such astonishing returns in 2020 as high-growth tech stocks soared towards the tail end of the year.

While this favoured the trust in 2020, in 2022 it could go the opposite way. Inflation is creeping up across the globe, and the way that central banks tackle this is by raising interest rates. Just last week the UK and US raised rates to 0.75% and 0.25%, respectively.

When rates rise, people shift their assets away from high-growth high-risk investments and into safer assets as they can achieve a higher return. This isn’t great news for a high-growth, tech-heavy trust like Scottish Mortgage.

The macroeconomic outlook has only been made more volatile by the tragic Russian-Ukraine conflict. This is the last thing that Scottish Mortgage shares need at the moment.

Would I buy?

The current macroeconomic climate doesn’t bode well for a trust like Scottish Mortgage. It could lead to some serious short-term volatility. However, here at The Motley Fool, we’re long-term investors. I think the long-term outlook could be bright for the trust. As such, I would consider buying Scottish Mortgage at the current share price for my portfolio.

The post The Scottish Mortgage share price is rising: should I buy now? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

Why is the Scottish Mortgage share price falling?

The primary driver behind the falling Scottish Mortgage share price is tied to the current state of the UK economy. In 2020, the Bank of England cut interest rates to just 0.1% in an effort to stimulate the struggling economy. This monetary policy served its purpose. However, a faster-growing economy, coupled with massive supply shortages of the pandemic, meant that prices have been steadily rising. The result of all of this is inflation. For example, the UK Consumer Price Index (the measure of prices of goods in the economy) rose 5.4% year-on-year in December 2021.

So how does this affect the Scottish Mortgage share price? Well, inflation is tackled by central banks raising interest rates to restrict the economy. In a nutshell, this means people can receive higher returns on their savings and hence are less likely to invest in stocks. During these times, high-growth stocks are usually hit the hardest.

Looking at the Scottish Mortgages portfolio, it’s heavily comprised of just this type of stock. For example, its top 10 holdings include NIO (2.5%), NVIDIA (3%), and Illumina (5.5%), which are all high-growth stocks. As inflation continues to climb around the globe, the Scottish Mortgage share price could be at an increased risk as high-growth stocks decline.

Long-term growth

That being said, here at The Motley Fool, we are interested in long-term results. Regardless of the short-term headwinds Scottish Mortgage is facing, I still think it could prove a strong long-term addition to my portfolio.

For example, as my fellow Fool Charlie Keough points out, over the past five years, Scottish Mortgage shares have climbed over 220%. Comparing this to the 5% growth in the FTSE 100, the investment trust’s long-term management becomes evident.

In addition to this, the nature of an investment trust allows me to pool my money into a variety of assets all under one investment. Down the line, this could significantly help reduce volatility and provides exposure to many different sectors and geographies. 

Should I buy now?

Rising interest rates are a threat that Scottish Mortgage must contend with over the coming months. However, the trust isn’t designed to deliver short-term gains. As such, I would be willing to discount the short-term volatility of the shares.

What’s more, the current lower price could provide me with a discounted entry point. Therefore, I would consider adding the shares to my portfolio for long-term growth.  

The post Should I buy the Scottish Mortgage share price slump? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood 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.

However, in the past 30 days, they have fallen over 11%. This is largely due to the Omicron variant posing an increasingly global threat. So, is now a good time to add the shares to my portfolio? Let’s take a closer look.

What is Scottish Mortgage Investment Trust?

In a nutshell, an investment trust is a publicly-traded company that aims to make money through investing raised capital in other companies. This can be appealing to potential investors as it allows them access to multiple shares under one diversified investment.

Scottish Mortgage is one of the best-known and best-performing trusts on the market. Its tech-heavy weighting has allowed the fund to grow at a momentous rate over the past few years. For example, over the latest three years, it has delivered 383% returns for investors. Although the fund has been able to capitalise on a bullish tech market, it has also demonstrated exceptional management. Take May 2021 — the fund announced it had slashed 80% of its Tesla position, banking high profits before the Tesla share price sank.

My macroeconomic concerns

The biggest concern I have for the Scottish Mortgage Investment Trust share price is linked to the broader macroeconomy. The Bank of England announced yesterday that it is increasing interest rates to 0.25%. This decision has come after months of increasing inflation, peaking at 5.1% in November in the UK. A similar story has been seen in the US, where prices have climbed even higher, rising 6.8% in the past year.

This could be bad news for equity markets. That is because as interest rates rise, people can gain a higher return on their savings, which carries substantially less risk than buying company shares. Therefore they sell stocks and shares prices fall as a consequence. 

This issue is especially worrying for Scottish Mortgage Investment Trust as it has such large exposure to high-growth tech stocks. These stocks are usually hit hardest by interest rates hikes. This is for two reasons. Firstly, they are usually more volatile than the wider market and investors tend to steer clear of them during uncertain markets environments. Secondly, they often carry high amounts of debt that can be magnified by increasing interest.  

In addition to this, the Omicron variant has magnified market uncertainty. The possibility of more lockdowns and travel restrictions is a huge threat to the global market. This is the main reason for the recent drop in the share price, I feel.

These factors combined have left Scottish Mortgage with a much riskier investment outlook in my opinion.

The Verdict

Don’t get me wrong, the trust has proved itself to be a top fund for high growth. This has been down to bullish markets and excellent management. However, for me, the current economic outlook is too risky to invest in it. As interest rates rise, I think we will see a pullback in many of the high-growth stocks the fund is exposed to. As such, I won’t be buying the share price dip.

The post Should I buy the Scottish Mortgage Investment Trust share price dip? appeared first on The Twelfth Magpie.

More reading

• As SpaceX stock plunges below its opening price, is it time to dump Scottish Mortgage shares?
• An AI beast just racked up 80-fold growth and is now a top holding in this FTSE 100 trust
• SpaceX doesn’t pay a dividend. So how come it may help these investors earn passive income?
• Scottish Mortgage shares are now even cheaper after SpaceX’s amazing stock market debut!
• Most Britons miss out on the first 20 years of investment compounding. Here’s how a Junior ISA or SIPP can change that

Dylan Hood has no position in any of the shares mentioned in this article. 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.