Is Scottish Mortgage Investment Trust now a buy?

The Scottish Mortgage Investment Trust has become the FTSE 100’s proxy for the health of the US tech sector in recent months as concerns of interest rate hikes rock the world’s biggest technology shares.

The Scottish Mortgage share price has been in the hands of traders that target the trust because of it’s tech-heavy holdings that include Netflix, NIO, Tencent, Tesla and Amazon.

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Such has been the volatility in US tech shares so far in 2022, Scottish Mortgage shares are now down 19% year-to-date having found support around 1,000p.

With shares building a base well below recent highs, investor may well be asking is Scottish Mortgage Investment Trust now a buy?

Scottish Mortgage Investment Trust shares chart – Source SharePad

One measure – and by no means an absolute indicator – is investor activity in their trading accounts. AJ Bell provides insight into investor views around Scottish Mortgage with the rankings of popular stocks in their client’s ISA accounts in January.

The Scottish Mortgage Investment Trust was the most popular trust with AJ Bell Youinvest ISA investors in January.

“ISA investors clearly weren’t put off by the fact that two of the most popular funds in recent years, Fundsmith Equity and Scottish Mortgage, saw a considerable downturn in January thanks to a sell-off in US tech stocks. Fundsmith Equity fell by 10% and Scottish Mortgage fell by 19%, as key tech holdings slumped over the course of the month,” said Laith Khalaf, head of investment analysis at AJ Bell.

“Of course, performance shouldn’t be judged over such a short period, and the exceptional track record of the managers of both Fundsmith Equity and Scottish Mortgage means they have an awful lot of credit in the bank, which explains why investors are looking through a temporary dip in form and continuing to back them for the long term.”

Scottish Mortgage and technology shares outlook

Although the popularity of Scottish Mortgage with AJ Bell’s clients highlights investors are still confident the trust will recover, this by itself is not enough to judge whether the stock is worth buying at these levels.

For a more calculated approach, investors must consider the immediate outlook for US tech shares and the broader investor sentiment around highly valued companies in a period monetary conditions are beginning to tighten.

The prospect of cheap money being removed from the market has thrown tech shares into the spotlight as their high valuations started to look vulnerable with rising bond yields.

The announcement of the highest rate of US inflation in 40 years will do nothing to subdue concerns around interest rates and analysts are now predicting the Federal Reserve will increase rate by 150bps in 2022.

“This would amount to 150 bps in rate hikes this year, vs our previous forecast of three 25 bps rate hikes,” wrote HSBC’s U.S. economist Ryan Wang in a note.

If such an increase rate comes to pass investors should expect further volatility in technology shares and Scottish Mortgage in 2022.

In addition, Scottish Mortgage is trading at a 2.6% premium to their Net Asset Value (NAV) suggesting there is scope for downside in shares if sentiment around tech sours further.

However, further weakness in the Scottish Mortgage share price could be viewed as a buying opportunity for investors given the historical ‘sell the rumour, buy the fact’ market positioning around interest rate increases and tighter monetary policy.

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