Out Of The Woods

2015-fireworks-dubaiThe double whammy of international sanctions and the dramatic fall in the oil price has not only impacted the Russian economy but has had a drag effect here in Dubai. The 40%+ drop of the rouble has seen a reported halving in the number of Russian visitors, according to the local business council. This is bad news for the local hospitality sector as the Orthodox Christmas and New Year are fast approaching which is traditionally their peak holiday time.

Dubai Investments continues to play an increasingly important role in the realty sector as it announces plans to spend US$ 2.7 billion over the next five years. Major projects include Dubai Investment Park (US$1.9 billion) and Mirdiff Hills (US$ 681 million). The former project will probably be debt financed, whilst the latter, including 1.5k residential units, a 230-room hotel, 200k sq ft of office space and retail outlets, will be internally financed.

The Dubai-based investment arm of Saudi’s Kingdom Holding Company has recently sold the Bur Dubai Movenpick Hotel and Apartments to an unnamed UAE company for a reported US$ 95 million.

Damac Properties has indicated that construction of its 1,250-room Paramount Hotel Dubai will begin in H1 2015 and be completed within three years. The London-listed property developer also announced the opening of its third serviced hotel apartments facility. The 355-room Damac Maison Cour Jardin is located in Downtown.

It seems that Abraaj Group has lost its battle with Kellogg’s to buy the Egyptian biscuit and cereal maker, Bisco Misr. The world’s largest breakfast cereal producer’s latest offer was more than enough to outgun the Dubai private equity firm’s final offer of US$ 143 million.

By the end of November, Dubai International had recorded a 5.9% increase in YTD passenger traffic to 64.0 million, although cargo took a 2.7% drop to 2.2 million tonnes as Al Maktoum International started to become the hub for many freighter services.

With Dubai Shopping Festival starting next week, it is forecast that 2015 retail sales will increase by about 5.0% to US$ 43.7 billion and will hit US$ 56.0 billion by the time 2020 Expo arrives in the emirate.

Following last month’s 3.1% inflation rate – a five and a half year high – November saw an easing to 2.8%. Housing and utility expenses, which form 39% of the hypothetical UAE shopping basket, rose 0.2%, month on month, and 4.4%, year on year, which some people still find hard to believe. Analysts expect an increase in the rate to 3.0% in 2015.

Until the end of May, the DFMI was on fire and was set to break all records especially when the MSCI’s upgrade of the bourse from frontier to emerging market status led to more overseas investment potential. The second half of the year saw spectacular volatility with speculative trading ending in the inevitable calling in of margin calls and panic selling. From a May high of 5406 points, the market tanked and, by early December, was trading at 2992, not helped by the depressing slashing of oil prices.

The DFMI opened its last week of 2014 trading on Sunday at 3887 and continued its downward trend to close on 3774 – 2.9% down on the week but 12.0% up on its 01 January opening of 3370. Bellwether stocks, Emaar Properties and Arabtec, were trading at US$ 1.98 and US$ 0.80 – 4.8% and 8.0% down on the week respectively.

China’s PMI slipped again in December to 50.1 – its lowest reading in eighteen months. This will not help oil as prices will continue to slide with a current over supply allied with a Chinese slowdown will naturally reflect in weaker prices – at least for the short-term.

However, there is no doubt that following its biggest decline since 2008, the oil price will come back a lot sooner than many analysts expect. These are the same experts who, this time last year, were predicting oil prices to remain firm at the US$ 110 – US$ 120 level.

Oil is the one commodity that is of interest to the whole world. The reason for this is the following table which indicates the estimated price of oil needed to balance the following countries’ budgets

oil-budget

Indeed falling prices hurt not only countries across the Middle East but also other producers and remedial action will be soon taken to return to the status quo. If the current global glut is a prime reason for the oil price drop, then some countries will have to reduce production which will bring supply and demand to some form of equilibrium.

Some of the big losers in 2014 are listed below:

LOSERS

 

Curr

Unit

31 Dec 14

01 Jan 14

%age

 

30 Jun 15

Iron Ore

 

US$

lb

73

135

-45.93%

 

85

Rouble

 

US$

 

0.017

0.030

-43.33%

 

0.024

Oil – Brent

 

US$

Barrel

57.33

102.5

-44.07%

 

72

Coffee

 

US$

lb

161

260

-38.08%

 

210

Cotton

 

US$

lb

62

86

-27.91%

 

65

Silver

 

US$

oz

15.77

20.15

-21.74%

 

16.2

Copper

 

US$

lb

2.88

3.37

-14.54%

 

3.00

AUD

 

US$

 

0.81

0.89

-8.99%

 

0.76

GBP

 

US$

 

1.53

1.64

-6.71%

 

1.57

Gold

 

US$

oz

1,186

1,236

-4.05%

 

1,250

FTSE 100

 

 

 

6548

6730

-2.70%

 

6500

 

 

 

 

 

 

 

 

 

WINNERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CS1300

 

 

 

3532

2291

54.17%

 

3480

S&P 500

 

 

 

2091

1831

14.20%

 

1990

DFMI

 

 

 

3774

3370

11.99%

 

3600

ASX All Ords

 

 

 

5415

5352

1.18%

 

5450

As can be seen, some of the world’s stock markets performed well in 2014 – a sure sign that all will not be as rosy in the new year. 

The other major problem area is Russia and again there is no way that the West will let this economy go under. The central bank has restored calm after the disastrous Black Tuesday so that most of the rouble losses that day have been recovered. Although the current low oil prices and international sanctions will see the economy go into inevitable recession in Q1, the Russian bear will bounce back battered and bruised.

Gold is not being helped by a strong dollar, the increasing probability that interest rates will soon rise and a general lack of consumer confidence in the yellow metal.

The eurozone continues to be an economic headache and a drag factor on global growth. The bloc’s problems have been exacerbated by the continuing political crisis in Greece where a snap 25 January election has been called. The likely outcome is that the left wing Syriza party will win and that they would call for the write-off of the country’s US$ 384 billion debt and renegotiations of agreements with the troika (EU, ECB and IMF). It is six years ago that the Greek economy almost collapsed and five years since the euro crisis started there; now it seems that this next one will have a more damaging impact on the eurozone.

Mario Draghi, the ECB’s president will have to come good on his July 2012 promise that he would do whatever it takes to save the euro.

On the local front, any property related surveys have to be taken with a pinch of salt because they all seem to come up with different conclusions on the state of the sector. No doubt this market will remain flat in H1 but will recover later in the year. Until volumes expand, the DFM will remain volatile but will head north after a shaky start to the year. However there will be little appetite for IPOs as liquidity will remain a problem throughout the year.

Although it will again be a difficult year to make money, there are two sure fire winners – coffee and olive oil. Coffee prices fell 38% in 2014 but with major supply problems in Brazil, the inevitable shortage will see a price hike. Likewise with olive oil where the harvest has been blighted by bad weather and insects which will result in a healthy price rise this year.

There is doom and gloom all around the financial world. However, the world’s two largest economies are still in growth mode – USA and China are forecast to expand by 3.5% and 7.0% in 2015. The global economy is not exactly in rude health but is in better shape now than it was this time last year. If these two powerhouses can drive global growth in 2015 then the prognosis will be a lot better than many pundits forecast but even then the world will still not be Out Of The Woods.

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