The Scottish Mortgage Investment Trust (LSE:SMT) share price is down 56% from its pandemic-era highs. At the time, growth-oriented stocks were on a bull run, as retail investors made increasingly speculative bets amid a Covid-induced change to our ways of living. So, if I had invested £5,000 at the peak, today I’d have just £2,200. That’s a pretty disappointing result.
Essentially, as Scottish Mortgage reflects the value of the companies it owns, the falling share price is reflective of the broader move away growth stocks, with obvious exceptions.
But, what about now? Is Scottish Mortgage investable? Here’s one take on it.
The bull case
Historian Niall Ferguson contends that great power conflict, like the one we’re seeing today, generates innovation. His argument is rooted in the historical observation that during times of geopolitical rivalry and conflict among major powers, there is often a surge in technological advancement and innovation. This phenomenon can be attributed to several factors:
- Competition for survival. Great powers engage in conflict with the aim of securing their survival and dominance on the global stage. This competition drives them to invest heavily in research and development, often leading to breakthroughs in various fields such as military technology, aerospace, and communications.
- Resource allocation. During conflicts, governments divert significant resources towards supporting their war efforts. This allocation of resources can fund ambitious scientific and technological projects that might not have been feasible during peacetime.
- Technological spillovers: Innovations developed for military purposes often find civilian applications. Technologies like GPS, the internet, and radar, originally developed for military use, have transformed various aspects of civilian life and industry.
- Human capital: Wars or cold wars often lead to a mobilisation of intellectual and human resources. Scientists, engineers, and skilled labor are drawn into the war effort, creating a synergy of expertise that accelerates technological progress.
So, how does this connect to Scottish Mortgage? The Scottish Mortgage portfolio is known for its forward-looking approach to investing in disruptive and innovative companies.
If we apply Ferguson’s argument, a portfolio like Scottish Mortgage could benefit from the innovation generated during great power competition.
Companies involved in defence, aerospace, and technology sectors often thrive during such periods due to increased government spending and research support.
As innovation spreads across industries, Scottish Mortgage’s diversified holdings in innovative companies may see substantial growth potential.
The bear case
The above is a very generalised approach to the Scottish Mortgage portfolio. However, when we’re talking about a fund that has dozens of holdings, it’s hard to analyse each holding individually. Nonetheless, there are some important general observations to make regarding the portfolio.
Firstly, 26% of Scottish Mortgage’s portfolio is in unlisted stocks. These are companies that are not listed on the stock exchange and therefore don’t have a valuation that has been established by the market.
For example, SpaceX’s owners estimate the company’s value at $150bn, equating to a valuation of 33 times its revenue. Maybe that’s a fair valuation, but it’s hard to tell given the limited amount of information available.
Moreover, Scottish Mortgage has a significant Chinese holding, including companies like Nio. Amid this great power competition, and China’s debt problem, some analysts are suggesting the Asian superpower is un-investable.
Personally, I see Scottish Mortgage as a strong long-term purchase, but it could fall further in the near term.
