Something Just Like This

VAT kicked off in the UAE – and Saudi Arabia – on Monday, with a standard 5% rate. The country’s coffers are expected to be boosted by US$ 3.3 billion in the first year of operations. Most goods and services will be affected although education, residential rents, medical treatment and public transport will be zero-rated. According to the UAE Finance Ministry, receipts from VAT will be used “for infrastructure development, upgrading public services and boosting the country’s economic competitiveness.” The other four GCC states are expected to introduce VAT by early 2019 at the latest.

With the introduction of VAT – and the estimated 2% additional hike in the inflation rate – many, including the Hay Group, expect real wages to fall as the 4.1% hike in remuneration will be lower than the forecast 4.6% inflation level. In the current environment, a 4.1% pay increase in 2018 looks highly improbable so consumer spending will have to be pulled in, to the detriment of the local economy.

At the start of the year, industry experts always seem to come out with dire warnings that the next twelve months will see an over-abundant realty supply chain. However, such high numbers never materialise and are often 50% lower than expectations by year end.

According to latest Bayut.com statistics, Dubai International City recorded the largest fall in rents last year – at 16% – to US$ 11.4k for a 1 B/R apartment. Over the year, the only type and location that posted an increase in rent were studio apartments in Mirdiff. However, as sale prices nudged lower, yields for both villas – 5% – and apartments – 7% – remained largely unchanged. Overall prices were down in 2017, although there were bright spots that posted marginal increases – 2 B/R in JLT, 1 B/R on the Palm and studios in Dubai Sports City and Silicon Oasis.

Omniyat has signed a US$ 136 million deal with Ajman Bank to help finance a luxury development – comprising a 5-star hotel, residences and retail outlets – located in the Marasi development on Dubai Canal and slated for a 2020 completion date. The Dubai developer is in a cooperative partnership with Jenina Real Estate and Saudi’s Rashed Al Rashed Group. Further details will be released this quarter and will involve a world famous hospitality brand. Omniyat also announced that The Langham Downtown Dubai will open in Q3 2020. The project, located on the banks of the Dubai Canal, will house 167 rooms and 239 residences.

Bin Ladin Contracting Group LLC Dubai has won a US$ 105 million JV contract (between Nakheel and Spain’s RIU Hotels & Resorts) to construct an 800-key hotel resort and water park on Deira Islands. Completion will be by 2020. This contract sees the total project spend on infrastructure and construction work nearing US$ 2.2 billion.

Amlak Finance has completed its US$ 38 million development of 54 3/4 B/R villas in Mirdiff.

DEWA is confident of completing its massive Jebel Ali M-Station electricity and water desalination expansion project by Q3 which will cost US$ 3.1 billion. On completion, its electricity capacity will increase by 32% to 2.9k MW, whilst the station will be able to produce 149 million imperial gallons of desalinated water per day. The whole DEWA capacity is currently 10.2k MW and 470 MIGD.

This week saw somewhat of a record with four cruise ships docking at Port Rashid on the same day – for the first time ever. On board were 25.3k souls of which 21.4k were tourists. It was a good start to the cruise season, which goes on until October, during which time Dubai hopes to attract over 700k visitors, following a 15% hike in numbers last year to 650k.

Following two years of falling turnover, Dubai Duty Free posted a 5.6% increase in 2017 revenue to US$ 1.92 billion, as December, with a new monthly sales record of US$ 218 million, aided by a three-day 25% discount during the company’s 34th anniversary celebrations. As in the past, perfumes (US$ 300 million), liquor (US$ 297 million) and tobacco (US$ 188 million) accounted for 40.8% of total sales.

Last Sunday, not only were the shops jammed to capacity because of the introduction of VAT, the following day, but the RTA posted record passenger numbers totalling 1.806 million. On New Year’s Eve, the three transport options Metro/Trams, taxis and buses had passenger numbers of 870k, 546k and 390k.

Although 525 deaths were recorded on the country’s roads last year, it was 25.6% down on the 2016 figure, whilst the number of fatalities per 100k people also fell to 4.4. It is noted that speeding continues to be the main culprit accounting for 43.8% of road deaths. However, the number of issued fines for speeding over 70 km and 60 km fell by 38.8% to 56.6k and 22.7% to 100.3k respectively. There is no doubt that any reductions in accidents would save money in many ways and boost the Dubai economy no end.

The assets of UAE banks in November totalled US$ 732 billion, with conventional banks accounting for US$ 585 billion (79.9%) of the total and Islamic financial institutions the balance; there was a US$ 12.9 billion month on month increase. There were also rises in both credit value and banks’ deposits to US$ 434.6 billion and US$ 392.9 billion respectively.

On 30 December, Al Futtaim finally completed purchase of the Marks & Spencer franchise and retail business (comprising 27 outlets) in Hong Kong and Macau. The Dubai-based retailer, which has been in partnership with the UK company since 1998, now has 72 M&S stores in Asia and the Middle East.

Gulf Islamic Investments has acquired two German grade A logistics centres for Amazon at a cost of US$ 144 million. The UAE-based firm has now spent over US$ 500 million on similar assets in the European market and plans further additions of high quality commercial realty, focusing on Germany and the UK.

It is reported that majority owner, the Varkey Group, has sold to Malaysia’s Khazanah Nasional Berhad a 3% stake in GEMS Education for an undisclosed fee. The global sovereign wealth fund, with a consortium including Bahrain’s SWF, already had an indirect interest in the education provider through Dubai-based private equity firm, Fajr Capital. GEMS’ latest financials (for the year ending 31 August) indicated an EBITDA of US$ 261 million on the back of a US$ 926 million revenue stream.

Gulf Navigation Holding, with year-end assets 12% higher at US$ 32 million, is to increase its capital base by US$ 122 million to reach US$ 272 million. The IPO is expected in Q1 with the money raised being used to support ambitious expansion plans, including the addition of twenty new vessels by 2020.

The DFM opened on Tuesday (02 January), at 3370 and started the year in bullish mood rising 94 points (2.8%) by Thursday, 04 January, to close at 3464. Emaar Properties was US$ 0.13 higher at US$ 2.02, with Arabtec up US$ 0.02 at US$ 0.67.  Volumes were lower at 389 million shares traded on Thursday, valued at US$ 161 million (compared to 572 million shares traded at US$ 206 million the previous Thursday – 28 December).

By Thursday, Brent Crude traded US$ 3.29 (5.1%) higher at US$ 68.07, with gold heading the same direction – up 4.0% from US$ 1,270 to US$ 1,321 by 04 January 2018. For the past year, black gold soared by US$ 9.80 (17.25%) from US$ 56.82 to US$ 66.62, whilst the yellow metal jumped US$ 154 (13.38%) from US$ 1,151 to US$ 1,305.

Following a class action suit in the US, Petrobas has been landed with a US$ 3.0 billion fine by authorities. The Brazilian state oil company suffered from a corruption scandal, with bribes being paid to officials and politicians by outside contractors to curry favour. Former chief executives, Maria das Gracas Foster and Jose Sergio Gabrielli, were caught up in the far-reaching scandal. The oil giant claimed to be a victim of a kickback scheme which had already cost Petrobas an estimated US$ 1.8 billion.

Despite the Trump tax cuts, BP expects to take a US$ 1.5 billion hit, as the petro giant will have to revalue some of its US deferred tax assets and liabilities. Several other companies will be caught under  the same net and will have to pay out more tax in the short-term, whilst international entities will be levied a 15.5% tax on repatriated overseas earnings.

Wixen Music Publishing Inc is the latest music publisher to sue Spotify (for US$ 1.6 billion) for alleged copyright violations, including works by Neil Young, Tom Petty and The Doors. Nevertheless, it seems that Spotify is planning an IPO on the New York Stock Exchange as early as March. The music streaming company, founded in Sweden and with more than 140 million users and a 30 million-song catalogue, sowed the seeds for the share issue in 2016 with a US$ 1 billion agreement with various private equity firms. (Interestingly, UK music fans streamed 68.1 billion songs last year, equating to over 1k per person and 36.4% up on 2016).

It is a surprise to see five English football clubs ranked in the top nine in the world, with the biggest economic growth potential. The Soccerex Football Finance 100 is based on different factors including potential owner investment, net debt, bank balance, value of players and ground/training facilities. The five EPL clubs are Manchester City (1), Arsenal (2), Tottenham Hotspur (5), Manchester United (7) and Chelsea (9).

BA’s owner, IAG, has paid US$ 24 million for the assets of the bankrupt Niki, founded by former motor racing world champion, Niki Lauda. It will buy 15 of the 20 Austrian airline’s planes and take over its slots at Munich, Vienna and Zurich, as well as reemploy 75% of the 1k personnel. The Anglo-Spanish group, which will incorporate Niki with its recently launched budget airline Vueling, also owns Aer Lingus and Iberia. Unlike a lot of airlines, it also expects a 20% surge in operating profits to US$ 3.6 billion this year.

After a truly miserable 2017, during which it issued three negative profit warnings, Carillion starts the year facing an investigation by the Financial Conduct Authority, concerning the “timeliness and content” of some past announcements it had made. The infrastructure company, which employs 40k staff, has been in so much trouble that its share value sank by more than 90% last year.

There were mixed results over the festive season for UK retailers, with the most disappointed having to be Debenhams. It has issued a profits warning, that saw its share value plummet by over 21%, after 17 weeks of like-for-like sales to 30 December were 2.6% lower, year on year. It now expects annual profits in the region of US$ 82 million against market expectations of US$ 113 million. However, it did report that Christmas on-line sales were up 15.1%.

On the other hand, Next, even surprised its own management, by posting a 1.5% rise in full-price sales (as opposed to an earlier forecast of negative 0.3%) over the festive season, helped by the colder than normal weather conditions; its shares rose 6.7% in Wednesday trading. Although store sales fell 6.1% in the eight-week period to 24 December, on-line trading jumped 13.6%, so it upped its annual profit estimate to almost US$ 1 billion.

The Co-op is to invest US$ 216 million to add 100 new food stores this year that will offer 1.8k new employment opportunities; 20% of the outlets will be opened in London. The retailer is planning to buy Nisa Retail, subject to Competition and Markets Authority approval, and has recently signed an agreement with the Costcutter Group to become its exclusive wholesale supplier for its 2.2k outlets.

Citigroup is planning to depart from a 2004 pact – along with Morgan Stanley and UBS Group – which allowed their financial advisers to change companies without the threat of being sued. The agreement signed by 1.7k firms is now set to unravel as, according to Morgan Stanley, the Protocol for Broker Recruiting had become full of “opportunities for gamesmanship and loopholes”.

Hyundai/Kia had a disappointing 2017, with sales of 7.25 million vehicles – one million down on company forecasts and the third year in a row that targets have been missed. Despite the shortfall, the South Korean company is still the fifth largest in the world although it is losing traction in the US market where sales dipped by 11%, whereas total sales elsewhere were only 7% off.

Not surprisingly, US authorities have stepped in to stop the US$ 1.2 billion sale of Moneygram to China’s Ant Financial – the digital payments firm for Jack Ma’s Alibaba.

China ended the year with positive news on the manufacturing and production fronts. The December Caixin PMI rose 0.7 to 51.5, indicating that the manufacturing sector is performing well, mainly because of robust output and new orders. To the outsider, it seems that the Chinese economy performed a lot better than many expected in 2017.

There is no doubt the importance that housing, the country’s largest asset valued at US$ 5.3 trillion, has to the Australian psyche, with home loans of US$ 1.3 trillion representing 60% of its banks’ total assets. However, after five years of solid growth – with Sydney and Melbourne increases of 75% and 59% – prices are starting to dip. How far they fall in 2018 remains to be seen but at least a 5% drop is on the cards.

The Institute for Supply Management December PMI jumped 1.5 to 59.7, reflecting the strength of its manufacturing sector as well as the improving US economy. Driven by marked improvements – in new orders (up 5.4 to 69.4) and production (1.9 higher at 65.8) – the index surprised analysts who had forecast a fall of 0.3 to 58.1. Early next week, the release of the non-manufacturing index is expected to see the service sector nudge higher as well. Other data shows that the pace of price growth is moving, with the December prices index surging 3.5 to 69.0, with employment expansion remaining firm.

Blog Oz                  
30 June 30 June     Unit %age 2017 31 Dec 17 31 Dec 16 31 Dec 15 31 Dec 14 31 Dec 13
1,325 1,365 Gold US$ oz 13.38% 1,305 1,151 1,060 1,186 1,236
66.50 79 Iron Ore US$ lb -4.96% 71.28 75 47 73 135
68.60 35.00 Oil – Brent US$ bar 17.25% 66.62 56.82 36.40 57.33 102.50
120 127 Coffee US$ lb -5.11% 126.2 133 124 161 260
87 85 Cotton US$ lb 13.77% 78.5 69 64 62 86
17.50 20.00 Silver US$ oz 6.19% 16.99 16.00 13.82 15.77 20.15
3.40 3.50 Copper US$ lb 33.06% 3.30 2.48 2.14 2.88 3.37
0.77 0.80 AUD US$   8.33% 0.78 0.72 0.73 0.81 0.89
1.37 1.40 GBP US$   8.87% 1.35 1.24 1.48 1.53 1.64
1.19 1.25 Euro US$   14.29% 1.20 1.05 1.09 1.21 1.38
0.018 0.020 Rouble US$   6.25% 0.017 0.016 0.014 0.017 0.030
7,500 8,000 FTSE 100     7.64% 7,688 7,142 6,242 6,548 6,730
3,850 4,100 CS1300     21.78% 4,031 3,310 3,731 3,532 2,291
2,750 2,850 S&P 500     19.48% 2,674 2,238 2,044 2,091 1,831
3,600 3,250 DFMI     -4.56% 3,370 3,531 3,151 3,774 3,370
6,050 6,355 ASX     8.93% 6,171 5,665 5,345 5,415 5,352
1,200 45 Bitcoin US$   1210.72% 13,081 998 427 302 817

From the table above, it can be seen that all but three of the sixteen listed indicators moved in positive territory in 2017. The three negative results were iron ore, 4.96% lower at US$ 71.28, coffee 5.11% off at US$ 126.2 and the Dubai Financial Market dropping 4.56% to 3,370. There are two forecasters willing to pit their wits against the market and their H1 forecasts are on the left of the table.

Both gold and Brent defied many analysts’ expectations by showing double digit growth figures of 13.38% and 17.25% respectively (a year earlier the increases were 8.6% and 56.1%). Gold is likely to lose a little of its sheen this year, as global central banks target higher interest rates which makes the bond and interest rate markets more attractive to the detriment of gold; however, the weak dollar may dilute that effect somewhat, resulting in little change in its value.

Last year saw gold grow at double the pace of silver but 2018 promises to see the underperforming metal bounce back as the yellow metal trades largely unchanged over the next six months. Silver will benefit from shrinking supply and an improved demand growth environment and should nudge 3% higher.

Take any forecast on future oil prices with a pinch of salt to put on the egg of faces of many analysts who, twelve months ago, forecast 2017 prices at under US$ 40. Much will depend on whether the agreed quota cuts, and output levels of non-OPEC producers including the ever increasing number of shale operators, continue at current levels. If global growth comes in at even IMF estimates, that will have a positive impact on prices that could top US$ 70 by June. Furthermore prices will get a boost from the upcoming Aramco IPO but this will probably not ibe felt until Q3.

Although most commodity prices are expected to show moderate growth, there could be a downturn of fortunes for iron ore, as China grapples with over-supply issues and on-going closures of its old, polluting steel mills. With the likes of Brazil and other low cost producers ramping up supply, prices are expected to dip in H1 by as much as 8%, especially since Chinese demand slows.

Coffee is expected to continue its recent dip in prices and could well be 5% off come 30 June – although do not expect the price in the coffee shop to follow suit, as other on-costs head in the other direction.

Cotton was the pick of the crop in 2017 and it looks more of the same in 2018. Major problems in two of the world’s biggest growers, India and Pakistan, have cut back on the supply chain, with the resultant slack being taken up by the likes of the US; latest data shows that there is a 29% increase in year on year commitments for US cotton exports.

With copper prices moving upwards towards the end of the year, there is every chance that this will continue into the New Year on the back of increased Chinese demand. Furthermore as there are no new significant supply lines on the horizon, allied with a global reluctance to boost production, prices could be 3% higher by mid-year.

Over the recent past, the Australian dollar has strengthened to 0.78 against the US$, coming off lows of 0.74. Although the probability of improving global growth – and its direct impact on commodity prices – would benefit the “lucky” country, it is likely that any uptick in its currency is by and large already priced in the market.

The surge in most currencies – including the much maligned sterling – points to a dollar weakness – a possible Trump ruse to make US exports cheaper. Two big ifs will push sterling higher in H1. If the current 3.1% inflation rate were to fall and the sluggish wage growth improves, then the currency will continue its upward trajectory, and will once again amaze some analysts who were predicting dollar parity this time last year.

To the surprise of many, the euro had an impressive 2017 that witnessed a 14.29% jump to the greenback and 3% up on sterling. Whether it remains so buoyant in H1 is open to conjecture as it will face headwinds on several fronts including on-going problems with Greek debt, Catalonia and the Italian March election just to mention three. These could be offset if the ECB slows down its massive US$ 1.2 trillion stimulus package and Brexit negotiations do not hit an impasse.

The Russian rouble – in line with its economy – has been hit by sanctions and softer industrial output. Following negative growth in both 2015 and 2016, last year saw the world’s sixth largest economy return to positivity. The 1.7% expected growth last year is expected to continue on similar lines in 2018. That being the case – and oil prices continue at current levels – the rouble is expected to trade around the same level.

There is only one thing to say about the global bourses – avoid them like the plague especially now they are at record highs. The three “western” indicators have all shown double digit growth over the past two years (S&P 500 – 30.8%, FTSE 100 – 23.2% and ASX 200 – 15.4%) but will surely run out of steam. The volatile CSI 300 goes up and down year by year and looks certain for a major correction, after climbing 21.8% in 2017 (but only 8.0% over the past two years). Strangely, it is the DFMI that could see an early year rally and even if it climbed 8% to 3,640 (pre-Ramadan), it would still be 33.6% lower than four years earlier in May 2014, when it was trading at 5,088.

April Fool’s Day has come early with reports in the FT that the UK is interested in joining the Trans-Pacific Partnership – and the likes of Commonwealth countries Australia, Brunei, Canada, Malaysia, New Zealand and Singapore, along with Chile, Japan, Mexico, Peru and Vietnam. This is the same body from which President Trump withdrew the US and he did so for a reason – that he thought it was a ridiculous trade deal; Theresa May should take note and stay well clear of Something Just Like This!

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