3 reasons Scottish Mortgage shares could explode in a stock market recovery

Scottish Mortgage shares are down 34% in 2022, but could they be a great buy as global stock markets show signs of rebounding? Our writer investigates.

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I’ve been cautious about investing in Scottish Mortgage Investment Trust (LSE: SMT) during what’s been a torrid year for Baillie Gifford’s flagship fund. However, with glimmers of hope that the worst of the stock market downturn could be behind us, I’m starting to become bullish on Scottish Mortgage shares.

Here are three reasons the FTSE 100 investment trust could be an excellent stock market recovery pick for my portfolio.

US growth stocks

First, Scottish Mortgage owns multiple US stocks with strong potential for future growth. For example, biotech players Moderna and Illumina as well as electric vehicle company Tesla feature among its top four holdings. Collectively, they make up 18.5% of the investment trust’s portfolio.

Many of these stocks have suffered during bear markets in the S&P 500 and Nasdaq. This in turn has depressed the Scottish Mortgage share price. However, speculation is mounting that the Federal Reserve might change its rate-rising strategy due to recession fears. This would come after a period in which Chairman Jerome Powell’s steely resolve has seen it hiking interest rates at the fastest pace in a generation.

A monetary policy change could be a catalyst for a return to a ‘risk-on’ environment across American trading floors. I believe many of Scottish Mortgage’s largest positions would be major beneficiaries from such a change in sentiment. By extension, the fund’s shares would likely rise in line with increases in the net asset value of its investments, should that eventuality materialise.

China reopening

Second, the investment trust also stands to benefit from developments on the other side of the Pacific. Around a fifth of its portfolio is concentrated in Chinese shares. The fund has substantial positions in tech giant Tencent and shopping platform Meituan in addition to others.

The Chinese stock market has suffered as the country grapples with coronavirus outbreaks while resolutely pursuing its ‘zero-Covid’ policy. Yet I expect there could be policy changes at the Chinese Communist Party’s 20th National Congress later this year. Following a 2.6% contraction in GDP during Q2, I wouldn’t be surprised to see the focus shift from infection control to economic recovery.

Scottish Mortgage has almost unrivalled exposure to China among FTSE 100 stocks. If this giant emerging market returns to economic strength, the investment trust should prosper too.

Unlisted equities

Third, the fund also owns a substantial number of unlisted shares. Using access to scientific expertise to identify opportunities in conjunction with a long-term investing approach, Scottish Mortgage hopes at least some of these holdings will become future champions in the boom phase of the next economic cycle.

What we’re really looking for is effectively a few needles within what is a very, very large haystack.

Lawrence Burns, Deputy Manager

I like the exposure to equities I otherwise wouldn’t have access to. How these positions perform will be a crucial test for new manager Tom Slater following James Anderson’s departure earlier this year.

Should I buy Scottish Mortgage shares?

Of course, the shares aren’t without risks. A recession stateside might hurt the fund’s US holdings, China’s economic woes may continue, and I do have concerns that some of the unlisted equities could be overvalued.

Nonetheless, I’m increasingly optimistic Scottish Mortgage could soon return to blistering growth. I’d buy today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has a position in Tesla. The Motley Fool UK has recommended Tesla. 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.

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