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.
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.