Inflationary pressures have caused significant turmoil among tech stocks recently. In fact, the Nasdaq has fallen 30% year-to-date and over 20% in the past year. There are also no signs that these inflationary pressures are slowing down, with the annual inflation rate in the US rising to 8.6% in May. This is the highest it has been in 40 years, showing the gravity of the situation. The UK is also facing inflationary pressures, reaching nearly 8% in recent months. In the FTSE 100, Scottish Mortgage Investment Trust (LSE: SMT), which invests in many growth stocks, has been one of the worst affected. Indeed, its share price has fallen 45% in the past year and over 50% from its peak. But I think it is now time for me to buy Scottish Mortgage shares.
The recent fall
The reason for the recent decline in the share price is simple: as the value of the firm’s investments have declined, so has the value of the fund. In fact, the fund includes stakes in companies such as Moderna, Tencent and Amazon. Over the past year, Moderna has sunk over 40% in the past year, Tencent has fallen 38% and Amazon has crashed 39%. As the value of these companies have declined, the Scottish Mortgage share price has fallen in response.
There are also some worrying signs for the future. Indeed, as inflationary pressures continue, interest rates are likely to be raised further. This makes it more expensive to issue debt, which can have negative effects on the future growth of these companies. High inflation also reduces the discretionary income available for consumers, which could have further negative consequences for tech stocks. These are risks that must be considered in relation to Scottish Mortgage shares.
Why would I still buy Scottish Mortgage shares?
Despite these risks, I am still confident in the ability for the fund to make solid returns in the long term. This is due to its reputation for being excellently managed, making returns to investors of around 85% in the past five years. It also known for finding high-potential companies. For example, it invested in Tesla in 2013, when its share price was around $10. Tesla is now priced at around $700. It also invested in Nvidia in 2015, when the chipmaker had a share price of around $6. It has since soared to around $170. For this reason, I trust the company to find the highest-potential growth stocks in the market.
The fund is also very diversified, and I believe that this reduces its risk. For example, its tenth largest shareholding is Kering, the owner of Gucci and Saint Laurent. As luxury fashion consumers are less susceptible to inflationary pressures, I believe that this holding could be a good inflation hedge. Further, the fund invests in many privately owned companies, including Epic Games and ByteDance. As retail investors cannot participate in the growth of these companies, investing in Scottish Mortgage shares offers a great alternative. Therefore, I am willing to disregard the risks and open a small position in Scottish Mortgage Investment Trust for my portfolio.
