The Scottish Mortgage (LSE: SMT) share price climbed 13% in the first half of the year, but like many other stocks it hit a wall in July. It has since fallen 9% while in the same period, the FTSE 100‘s risen 1%.
The main reason for this is the fund’s heavy leaning towards US tech stocks like Nvidia and Amazon. Both are down between 6% and 8% since we entered the second half of the year. But it’s not just the US to blame. The fund’s fourth largest holding, Dutch chip-maker ASML, is down an eye-watering 25%.
All things considered, it’s not been a great period for tech.
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So why’s this happening?
Early August, fears of an impending US recession send ripples through global stock markets. Headlines waxed lyrical about stubbornly high inflation and how a ‘tech bubble’ would send markets spiralling.
A lot of this was overblown and based on one report revealing unexpectedly high unemployment in the US. Most markets recovered fairly quickly from the early August dip. But tech appears to have taken the brunt of the losses.
In fairness, stocks like Nvidia have been treading dangerously near correction territory for some time now. What goes up, must come down, after all. And doubly so when it goes up 2,500% in just five years.
What does this all mean for the stock?
It’s too early to tell if this week’s half-point interest rate cut by the Federal Reserve will make a huge difference to Scottish Mortgage. The S&P 500 experienced some volatility following the cut, rising 38 points on the news only to fall 56 in the next hour.
Fundamentally, the fund looks to be in a good position. Its price-to-earnings (P/E) ratio of 7.8’s decent and the stock’s trading at a 10% discount to net asset value (NAV). That suggests the current price could be a good entry point to buy.
Furthermore, some of its top holdings aren’t entirely tech-based stocks. For example, Ferrari, up 35.7% this year, and MercadoLibre, up 38%.
High-risk exposure
I think the current situation reveals the fund’s over-exposure to riskier growth stocks. Management’s recently tried to reduce this slightly, selling some of its Nvidia stock in June.
At the same time, it’s clear about maintaining its faith in the potential of artificial intelligence (AI). This is reflected in its Meta and TSMC holdings. If AI turns out to be a dud, it’s got a backup in e-commerce stocks like MercadoLibre, Shopify and Meituan.
My verdict
Scottish Mortgage has struggled lately and the past five years have been volatile. There’s a chance it’s taking some risk with tech- and AI-related stocks. In 2020 and 2021, this paid off well for the fund but that doesn’t mean it’ll continue.
Overall, I think this is just a mild dip. It’s unlikely the tech sector will continue to falter in the long run. I’m a bit hesitant to dive into tech stocks or buy more right now, but I’m happy holding my Scottish Mortgage shares.
