It’s now being reported that we could be in line for our first interest rate cut as early as May. I believe Scottish Mortgage Investment Trust (LSE: SMT) shares could benefit massively from this.
While the base rate still sits at 5.25%, Bank of England boss Andrew Bailey has said “we are on our way” to seeing rates start to fall. In a recent interview, he described it as “reasonable” that investors were pricing in up to three cuts this year. If that were to be the case, that could offer markets a significant uplift.
At 891.4p, Scottish Mortgage is some way off the levels its stock peaked at a few years back. But this might not be the case for much longer.
Why it has suffered
To understand why rate cuts will benefit the trust, I want to first explain why it has suffered in recent times.
A quick search on the trust’s website reveals that Scottish Mortgage “aims to identify, own and support the world’s most exceptional growth companies”. From that, it’s fairly clear to see why the trust has fallen by 40.4% from its all-time high in October 2021.
In short, these sorts of companies are unpopular with investors in the current economic environment. They tend to have large amounts of debt to fuel growth. With higher rates, this debt becomes more expensive to service.
Why it could prosper
But I think that could be about to change. Lower rates will mean a reduction in borrowing costs. For the businesses that Scottish Mortgage owns, such as technology firms, this is great news. Reduced rates often means that developing new products is cheaper. This also allows for more capital to be spent on things such as research and development.
Aside from interest rates, there are other reasons I like the look of Scottish Mortgage.
The stock seems undervalued to me. It’s trading at a 4.7% discount to its net asset value. That means if I were to buy the trust right now, I’d be purchasing the companies that it owns cheaper than their going market rate. That said, I’m aware that 26.2% of its portfolio consists of private companies. Valuations for these businesses aren’t always easy to arrive at. That’s certainly something worth considering.
Its share price has been trending upwards lately. This year, it has climbed 13.5%. In the last 12 months, it’s up 31.7%. The trust also announced a £1bn share buyback scheme last month, which provided it with a further lift. I’m optimistic that it’ll carry this positive momentum into the rest of 2024 and beyond.
I want to buy
Of course, talk surrounding rate cuts at the moment is purely speculation. We’ve been discussing this for a while and we’re still waiting. Any sign of delay could see the Scottish Mortgage share price take a hit. That’s a risk I must consider.
That being said, I still want to pick up some shares this month. I’m a patient investor. So, I’m fine with some short-term volatility.
Rates will inevitably be cut. And while it’s by no means guaranteed, I’m hopeful this will provide the stock with a boost. My plan is to open a position this month.
The post Here’s why Scottish Mortgage shares could surge when interest rates are cut appeared first on The Motley Fool UK.
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Charlie Keough has no position in any of the shares mentioned. 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.
