Scottish Mortgage Investment Trust (LSE: SMT) shares had a knockout 2020 and have continued to deliver solid returns throughout 2021. The shares have risen over 8% since I last covered them in June. However, new challenges now lie ahead for SMT. I’m going to have a closer look to see whether I should add more shares to my portfolio today.
Chinese equity volatility
One thing I like about investment trusts is the breadth of stocks you get access to under one investment. SMT is no different here, offering a broad-reaching tech-dominant portfolio. However, some of SMT’s top Chinese holdings, including Tencent (4.2%), NIO (3.5%), and Alibaba (3.3%), have been recent causes for concern.
Regulatory crackdowns on several companies and industries have stifled growth. For example, Alibaba was fined a $2.8bn for anti-competitive practices and also saw the IPO of its financial affiliate Ant Financials halted. A similar case occurred with Tencent. It faced a hefty anti-competition fine and had its exclusive music listening rights withdrawn. This could be a problem moving forward for SMT shares as these companies make up such a large proportion of its portfolio.
Rising yields/inflation worries
Another concern for SMT is the impact that rising bond yields have on the wider growth stock market. The tech sell-off at the start of 2021 was fuelled by inflationary worries indicated by sharply rising bond yields. SMT’s portfolio is heavily comprised of early-stage growth stocks. These types of stocks are hit the heaviest by inflation as they often operate in debt and a rise in interest rates could prove catastrophic. Inflation also erodes the value of these companies’ future projected earnings. Moving forward, this is something I will definitely be keeping my eye on for Scottish Mortgage Investment Trust shares.
Scottish Mortgage Investment Trust shares: long-term outlook
The reason SMT is heavily invested in early-stage companies is its long-term outlook. As my fellow Fool, Charlie Keough, points out SMT’s aim is to “maximise its total return to shareholders over the long term”. Statements like this indicate the firm is likely looking past shorter-term problems such as Chinese crackdowns. In addition to this, China is the world’s fastest-growing economy. Having such a large stake in this growth should pay off for Scottish Mortgage Investment Trust shares in the future.
In addition to this, Scottish Mortgage Investment Trust shares are up 6%, 14%, and 40% over the past month, six months, and one year, respectively. This shows that no matter the problems SMT has been faced with, it has been able to manage them effectively.
I have been an investor in Scottish Mortgage Investment Trust for some time. However, I would wait before adding any more to my portfolio. I would like to see how Chinese equities perform in the coming months and how SMT manages its portfolio in reaction
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Dylan Hood owns shares of Scottish Mortgage Investment Trust and NIO. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd. and NIO Inc. 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.