The Scottish Mortgage Investment Trust (LSE: SMT) share price soared over 105% throughout 2020. And 2021 has also proved an encouraging year, with shares in the tech-heavy investment trust creeping up almost 10% year to date.
However, in the past 30 days, they have fallen over 11%. This is largely due to the Omicron variant posing an increasingly global threat. So, is now a good time to add the shares to my portfolio? Let’s take a closer look.
What is Scottish Mortgage Investment Trust?
In a nutshell, an investment trust is a publicly-traded company that aims to make money through investing raised capital in other companies. This can be appealing to potential investors as it allows them access to multiple shares under one diversified investment.
Scottish Mortgage is one of the best-known and best-performing trusts on the market. Its tech-heavy weighting has allowed the fund to grow at a momentous rate over the past few years. For example, over the latest three years, it has delivered 383% returns for investors. Although the fund has been able to capitalise on a bullish tech market, it has also demonstrated exceptional management. Take May 2021 — the fund announced it had slashed 80% of its Tesla position, banking high profits before the Tesla share price sank.
My macroeconomic concerns
The biggest concern I have for the Scottish Mortgage Investment Trust share price is linked to the broader macroeconomy. The Bank of England announced yesterday that it is increasing interest rates to 0.25%. This decision has come after months of increasing inflation, peaking at 5.1% in November in the UK. A similar story has been seen in the US, where prices have climbed even higher, rising 6.8% in the past year.
This could be bad news for equity markets. That is because as interest rates rise, people can gain a higher return on their savings, which carries substantially less risk than buying company shares. Therefore they sell stocks and shares prices fall as a consequence.
This issue is especially worrying for Scottish Mortgage Investment Trust as it has such large exposure to high-growth tech stocks. These stocks are usually hit hardest by interest rates hikes. This is for two reasons. Firstly, they are usually more volatile than the wider market and investors tend to steer clear of them during uncertain markets environments. Secondly, they often carry high amounts of debt that can be magnified by increasing interest.
In addition to this, the Omicron variant has magnified market uncertainty. The possibility of more lockdowns and travel restrictions is a huge threat to the global market. This is the main reason for the recent drop in the share price, I feel.
These factors combined have left Scottish Mortgage with a much riskier investment outlook in my opinion.
Don’t get me wrong, the trust has proved itself to be a top fund for high growth. This has been down to bullish markets and excellent management. However, for me, the current economic outlook is too risky to invest in it. As interest rates rise, I think we will see a pullback in many of the high-growth stocks the fund is exposed to. As such, I won’t be buying the share price dip.
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Dylan Hood has no position in any of the shares mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. 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.