More bold moves from the tech sector: Alibaba (NYSE:BABA) said on Monday it would invest 200 billion yuan ($28.26 billion U.S.) in its cloud computing division over the next three years, highlighting how critical an area this is to the e-commerce giant’s future growth.
A statement from the company Monday morning said the money will be used to invest in infrastructure and technologies related to operating systems, servers, chips and networks, adding that it was spurred by the coronavirus pandemic.
“The COVID-19 pandemic has posed additional stress on the overall economy across sectors, but it also steers us to put more focus on the digital economy,” Jeff Zhang, president of Alibaba Cloud Intelligence, said in a statement.
Alibaba is the biggest cloud computing provider by market share in China — but it still trails U.S. giants Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ:MSFT) globally despite its international push, according to Synergy Research.
But Alibaba has put a concerted effort on cloud computing and analysts as well as executives see it becoming a critical area in the future, despite it currently accounting for just 7% of the company’s total revenue.
The latest investment could help the company expand its product and customer base, particularly in international markets, as it looks to battle Amazon and Microsoft. In China, meanwhile, Alibaba is facing rising competition in the cloud space from e-commerce rival JD.com.
On March 6, I wrote a column that discussed the history of markets after they have fallen 15 per cent. It said that returns had been quite strong, and based on that you should at least be holding your stocks, but probably buying more.
I took some heat for writing that, especially as markets continued to crater for another two-and-a-half weeks.
Today, the S&P 500 is up 5.5 per cent from March 6, and probably up six per cent including dividends. If you simply ignored the past three months, you would think that a quarterly return of six per cent is very good. Clearly, it is hard for anyone to have ignored the past three months, but there is a powerful lesson there. While the stock market doesn’t ignore today, it certainly puts it on mute. All investors would be better if they could do the same for today’s headlines (except this one of course).
The big question, as always, is what do I invest in now?
For the past three months we have definitely been looking to add to stocks as we thought there were bargains all over the place. Today, there remain sectors that are undervalued like energy and financials, which we believe will likely see some solid increases, but across the board, we no longer see a “pound the table” reason to increase stock weightings.
What does today look like?
We see balanced to maybe even slightly elevated valuations in stocks today in some sectors, dependent of course on how the economy recovers.
We see incredibly low interest rates that will likely stay low for an extended period of time.
We see traditional bonds as being an important but smaller piece of portfolios for safety, as yields are often going to be well under three per cent.
We still see some tremendous opportunities in preferred shares, where some blue chip companies have 10 per cent dividend yields that will be in place at least two to three years, and prices that have only partially recovered.
Like pension funds and foundations, we see tremendous opportunities in private credit that can deliver 7.5-per-cent-plus returns on a steady basis that are not directly linked to the stock market.
What does this mean for you?
The first step is to look at your long-term asset mix and you should probably be close to that mix today. If you are significantly out of step, then it is definitely time to rebalance. Hopefully, you didn’t make major shifts out of stocks over the past few months, but if you did, you should probably at least try to get closer to your longer-term levels.
The second step is to ask yourself if you need a new asset to add to your asset mix. Two of the areas where we see the best opportunities at the moment are in preferred shares and private credit. Do you have any money invested in either of these areas at the moment? If not, then it is worth looking at this further.
To delve a little deeper into preferred shares, these shares are ‘preferred’ to common shares because the dividend they pay either needs to be paid, or if not paid, it is effectively deferred and still owed to you. As long as the company remains in business, the preferred share dividends are an obligation that the company needs to pay. On the other hand, companies are free to raise or cut the dividends they pay on their common shares. Most of the Canadian market for preferred shares is made up of large blue-chip companies, with the big banks, big insurers and utilities, making up the majority.
At a high level, the market in Canada is split into fixed-rate preferred shares, which have a set dividend that doesn’t change, and rate-reset preferred shares. These pay a set dividend, usually for five years, and then the dividend is reset based on the five-year Government of Canada bond yield at that time.
Overall, preferred shares have been a weak investment for the past decade, in particular the rate-reset preferred shares. While there are a few reasons for this, the main one for rate resets is that interest rates have fallen, and as a result, the dividends paid have either been lowered, or are projected to be lowered at the next reset period.
An example of this would be Enbridge Series D. This rate reset preferred share will not reset until March 1, 2023. That means that for the next 33 months, it will pay 27.88 cents a quarter. At its current price the dividend yield is 9.94 per cent. If five-year bond yields go lower from here, it can hurt the price of these shares, but keep in mind that these Government Bonds are currently at 0.39 per cent, near the lowest rate in their history. Even based on this rate, if the rate was reset today, the dividend yield would still be over six per cent. If five-year bond yields rise from here, you will likely get capital gains on this Enbridge preferred share in addition to an almost 10 per cent dividend yield.
On the private credit side, there are a number of investments that are available for accredited investors, or through investment counselling firms.
In most cases, the COVID situation has only slightly affected returns for the best managed investments in this area.
Many investments that have had steady returns in the eight per cent annual range, have continued to see positive monthly returns, with year-to-date returns for the four months to April 30 being in the two-per-cent-plus range.
The private credit that we primarily focus on is lending to businesses at high interest rates, but with significant security and collateral (asset-based lending). The security often starts with hard business assets that are worth meaningfully more than the loan. The security sometimes includes personal guarantees from the business owner, including pledging their home. The security usually includes an ability to pull interest payments from the company’s bank account if they miss a payment. Because of strong lending covenants and active monitoring, default rates are extremely low.
Of interest, demand for these types of loans has been increasing as traditional banks are significantly slowing down any new lending during the current situation.
Given the consistency of returns in the eight per cent range, and lower interest rates on bonds and deposits, we see a big opportunity to invest in this asset class. Our firm has a fund that invests in a selection of our best ideas, significantly in the private credit space. We believe that with the steady investment returns the fund is targeted to generate along with its regular monthly income, this is even more appealing to investors today.
The key investing theme for today is that while you will generally want to go back to your long-term asset allocation strategy, the extremely-low-interest-rate world requires that you make a real adjustment to the assets you now include in your mix.
Ted is hosting a webinar on June 8 on Investing for Today, including how to include private credit investing in your portfolio. To attend the webinar, click here.
Telecommunications company SK Telecom increased its stake in Israel-based Nanox with an additional $20 million equity investment, the medical imaging technology company announced Thursday. This follows SK’s $5 million investment made in 2019, Ran Poliakine, CEO of Nanox, told Crunchbase News.
Although Nanox started in 2012, the company is attracting significant funds in a short period of time. The SK investment comes less than six months after Nanox’s $26 million venture round, led by Taiwan-based technology manufacturing giant Foxconn Technology Group. To date, Nanox has raised $80 million, according to the company.
As part of the new investment, SK’s CEO Jung Ho Park will join Nanox’s board of directors.
“We see Nanox as one of the most promising companies to make a real difference for early detection of disease and a higher standard of care to the humankind,” Park said in a written statement.
Nanox was formed by a group of former Sony engineers focused on nanotechnology, intending to utilize that technology to solve the problem of early detection imaging in health care, Poliakine said.
It aims to “democratize health care” by offering a “digital camera for the full body” among its range of medical imaging services that operate on a pay-per-scan business model and include online radiology diagnostics and AI decision assistive algorithms implementation, he said.
“We are like the LED of X-rays, and our technology is utilized on a small chip, so we can replace the hot cathode method invented 125 years ago,” he said. “What we have done is implement nanotechnology in an effectively controlled X-ray stream, designated to exact the procedure as well as make it low cost and accessible.”
A traditional scan in the United States costs an average of $3,000, while globally, that average is $300, Poliakine said. Nanox is charging $30 per scan.
“We are not trying to be altruistic, but the cost of technology has jumped so much that we put in that price point to increase accessibility,” he added. “It is important to push forward health care in a more uniform way and to break down the walls between rich and poor countries.”
SK has decided to deploy 2,500 scanners to enable this service, while Nanox plans to establish a wholly owned Korean subsidiary to scale up production on the Nanox X-ray source semiconductor in order t0 get 15,000 units out to physicians by next year, Poliakine said.
Financial planners and investment advisors have continued working from home during the COVID-19 crisis. With more US states announcing plans to reopen, some have begun to phase in a return with limited numbers allowed to be on the premises at any one time but most do not anticipate returning to their offices within the next few months. Companies are making investments in digital meeting technologies to improve the remote working experience. Many financial technology companies are also providing free access to online tools for planners who are working remotely.
Financial markets are beginning to show signs of recovery as states reopen their economies. In May, the S&P 500 index rose significantly compared to March lows. It is likely that investment advisors will see increased demand for their services from investors concerned about the financial fallout of COVID-19. Financial planners may also see increased business from new clients looking to build savings in preparation for future emergencies. The CARES Act made changes to rules for investment vehicles such as 410ks. As a result, advisors may see more demand from clients to withdraw funds to cover expenses.
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