Is Scottish Mortgage a Good Investment? Analyzing the Bull and Bear Cases
The Scottish Mortgage Investment Trust (LSE:SMT) has experienced a significant decline in its share price, down 56% from its pandemic-era highs. This drop is indicative of the broader shift away from growth-oriented stocks that occurred as a result of changes in investor sentiment during the Covid-19 pandemic. For investors who entered the market at its peak, this decline has resulted in disappointing returns.
However, despite this setback, there are still arguments to be made for the long-term investment potential of Scottish Mortgage. Historian Niall Ferguson suggests that great power conflicts can lead to increased innovation, which in turn can benefit companies such as Scottish Mortgage that focus on disruptive and innovative technologies.
During times of geopolitical rivalry, major powers often invest heavily in research and development to secure their survival and dominance. This investment can lead to breakthroughs in various fields, including military technology, aerospace, and communications. These advancements, originally developed for military use, often find civilian applications and have the potential to drive growth in various industries.
Considering Scottish Mortgage’s portfolio, which includes companies involved in defense, aerospace, and technology sectors, the fund could benefit from increased government spending and research support during great power competition. As innovation spreads across industries, the diversified holdings of Scottish Mortgage in innovative companies may see substantial growth potential.
However, it is important to consider the bear case as well. Scottish Mortgage’s portfolio comprises numerous holdings, making it challenging to analyze each one individually. One notable concern is that 26% of the portfolio consists of unlisted stocks, meaning that these companies do not have a publicly established valuation. The lack of available information makes it difficult to assess their true value accurately.
Furthermore, the fund has a significant Chinese holding, including companies like Nio. Concerns over China’s debt problem and the ongoing great power competition have led some analysts to question the viability of investing in Chinese companies. This uncertainty adds an element of risk to Scottish Mortgage’s portfolio and could impact its performance in the near term.
In conclusion, while Scottish Mortgage may be a strong long-term investment, there are factors that could affect its performance in the near future. The fund’s focus on disruptive and innovative companies aligns with the potential for increased innovation during great power competition. However, the presence of unlisted stocks and exposure to the Chinese market introduces additional risks. Investors should carefully consider both the bull and bear cases before making any investment decisions.