Scottish Mortgage Investment Trust (LSE: SMT) shares have fallen badly since the end of 2021. From their peak that year, they’ve lost more than half their value.
The trust has still outstripped the FTSE 100 over five years, mind. It’s up 25% compared to a 1.5% fall for the index. If we include Footsie dividends, it’s probably close to neck and neck.
But the stock has ticked up 11% since the start of May, and I can see three things that could send it up some more in 2023.
US confidence
One is a return to growth stock optimism in the US. And I think we’re already seeing the signs of it.
Tesla has been the big star of the US growth scene in recent years. But it looked badly overheated in late 2021, and its price-to-earnings (P/E) ratio reached over 1,000 at one point.
Tesla stock then plunged by 70% from its peak by the end of 2022. And that wasn’t good news for investment trusts holding it.
Tesla makes up about 5.2% of Scottish Mortgage’s holding, at today’s price. And that’s after more than doubling so far in 2023.
ASML, the trust’s biggest holding, is up 30% in 2023. But Scottish Mortgage shares are still some way behind. They’re down 5% so far this year.
The discount
The Scottish Mortgage share price fall has been made worse by the widening discount. That’s the difference between the trust’s shares and the underlying value per share of the assets it holds.
The discount was as big as 20% a few months ago. But now, with some of the biggest holdings starting to rise again, the discount is… stuck at 20%.
A discount usually means investors fear further falls in asset values, so they build that in to what they’ll pay for the trust. But then people build future expectations into the underlying stock prices anyway, don’t they?
So a big investment trust discount looks to me like pessimism doubled. And that makes me think I should buy twice as much.
Will investors finally spot that US growth stock optimism is returning, and not demand such a big discount? I think they must do, some time, surely?
The dangers
So what are the dangers of buying now? I mean, if the shares were as obviously cheap as I think they look, wouldn’t people be snapping them up?
Well, one risk is that this year’s US tech stock gains might be just a dead cat bounce. Very often, when a growth share bubble bursts, in can deflate in stages.
Who knows, maybe this time next year Tesla, ASML and all the rest might have collapsed again?
Then there’s UK investor sentiment. The markets seem averse to risk right now, with everyone seeking safety. And we don’t usually think of US tech stocks when we think safety.
But if we see sustained US growth recovery, and UK investors can shake off their fears, I reckon Scottish Mortgage shares might just put in a good second half in 2023.
