Scottish Mortgage Investment Trust (LSE:SMT) shares start the year 31% down against January 2022. The publicly traded investment trust, which focuses on growth prospects, reflects the value of the shares it holds.
So Scottish Mortgage shares have fallen in line with tumbling growth and tech stocks over the past 18 months.
But what does this mean for 2023? Well, at £7.40, the stock is trading near its three-year low. But can it outperform from this low starting point?
Headwinds
In 2022, global economic conditions became less conducive for traditional growth stocks. These are companies that generally need to borrow to fund their expansion.
But rising interest rates have increased the cost of borrowing. A contracting global economy is also an issue, as funding can be harder to come by and the market isn’t likely in reverse.
This is particularly challenging for growth stocks that are yet to become profit-making, and those without sizeable cash reserves.
As we enter 2023, the big issue is that these problems aren’t going away. There appears to be little sign that interest rate rises will stop in the first half of the year — in the UK at least — and economic growth is expected to flatline.
Can conditions improve?
As an investor, I’m always trying to look at least six-to-nine months into the future. And it does look like the second half of the year might be better than the first. That’s when we can hope to see interest rates come down and economic growth push upwards, particularly in Western nations.
There are several upsides when looking at the top companies within the Scottish Mortgage portfolio. Most of its top holdings are already profit-making, and several have sizeable cash reserves, including Tesla and Moderna.
Another upside is China’s reopening and abandonment zero-Covid. The next couple of months could be challenging as the virus spreads, but broadly I expect this to be positive for the business environment. Chinese stocks feature well among the Scottish Mortgage portfolio.
Will I buy more?
I’ve already bought Scottish Mortgage shares, but at the current position, I’d buy more. Valuations are a core feature in my decision making — I don’t want to pay for overvalued stocks. Stocks in the growth part of the market are now trading with much more attractive valuations following the correction.
Furthermore, Scottish Mortgage is currently trading at a 8.5% discount versus its net asset value (NAV). While the NAV can be difficult to calculate, especially when the trust owns non-listed shares, this sizeable discount should be considered a positive.
And finally, I see better news for the global economy on the horizon. The next few months might be challenging, but I’m buying now for improving economic conditions later in 2023.
It’s difficult to make forecasts in the current environment, but I believe Scottish Mortgage, with its star-stock pickers, will outperform the market in 2023 as a whole.
