God Only Knows

China State Construction Engineering Corporation has been awarded a US$ 140 million Damac Properties contract to build tower C of Aykon City, part of the developer’s US$ 2.0 billion project overlooking the Dubai Canal. CSCEC also won the contact for Tower B, awarded earlier in the year. The latest 62-floor tower, known as The Residence, will have 48 residential floors, with a total built-up area of 1.8 million sq ft, and will comprise studio to 1-3 B/R apartments.

This week witnessed the opening of Hampton by Hilton Dubai Airport, a tie-up between wasl Asset Management Group and Hilton. Apart from being the brand’s first foray in the region, it is its largest hotel to date, with 420 rooms.

A touch of Mediterranean is to grace Dubai, with a 192-berth super-yacht marina (Port de La Mer) and La Côte, featuring around 400 1-4 B/R apartments and a two-storey penthouse, across five low-rise buildings; completion is expected by Q4 2020. These two projects are part of Meraas’ La Mer beachside destination which will also feature retail options and restaurants, as well as 4-5 star hotels and a private beach.

Emaar Properties has begun construction work on its private island, Beach Vista residences, on Emaar Beachfront; the development comprises 33 and 26-storey towers.

Reports indicate that Emaar India has plans to launch up to eight  projects in 2019 and to use some of its 4.5k acres of land to set up JVs with interested parties; the Dubai developer will only share revenue with the chosen partners, who will develop projects of their own brand. In 2005, Emaar Properties and India’s MGF Group formed a JV, Emaar MGF Land, with an initial US$ 1.2 billion investment.

Flydubai posted an H1 loss of US$ 86 million – more than double the US$ 39 million deficit recorded in the same period last year. The main driver was the rising cost of fuel, up an average 35% over the year, which had a US$ 48 million impact on the bottom line. Meanwhile, revenue was 10.4% to the good, at US$ 763 million, with revenue per passenger kilometre growing 6.5%. In the first half of the year, the budget airline launched or restarted ten routes and expects to increase its fleet size by 9.8% to 67 Boeing 737s by the end of the year.

Dubai-based Novus Aviation Capital is to manage a junior consortium including the Development Bank of Japan Inc, NORD/LB Norddeutsche Landesbank and Boeing. The venture, known as Cedar Aviation Fund, will comprise a new junior debt fund designed to provide airlines and lessors with higher loan-to-value financing for the acquisition of Boeing planes.

By separating Inchcape Shipping Services Holding Ltd into two standalone companies, the Investment Corporation of Dubai has launched a new entity, ISS Global Forwarding. Focussing on supply chain logistics, and located in DAFZA, it will be involved in global freight forwarding, contract logistics and oil/gas projects. Initially, it will have a presence in eighteen countries but will expand operations in China and Asia Pacific.

In February, the Djibouti government abruptly cancelled its agreement with DP World to operate Doraleh Container Terminal and seized all its facilities which the Dubai-listed company had designed, built and operated. Yet again, the London courts have ruled in favour of DP World and this week barred the African authorities from treating its JV shareholders’ agreement with the Dubai port operator as “terminated”.

Jebel Ali Free Zone posted a US$ 162 million profit on the back of a 2.0% hike in revenue to US$ 270 million. Over the six-month period, the DP World unit saw assets rise to US$ 3.6 billion and an additional 293 to its client base.

Two of Dubai’s leading entities saw their credit rating cut by S&P Global. DEWA was downgraded to BBB, with a negative outlook, whilst DIFC Investments was lowered to BBB – with a stable outlook. One of the main reasons given was the fact that credit conditions in the emirate had deteriorated which could impact on the government’s ability to provide extraordinary financial support, if so required. With a massive increase in population, up 43.1% over the past five years to 3.119 million, (2.179 million – 06 September 2013),  Dubai has seen its annual GDP per capita fall 17.8% to US$ 37k over the five-year period.

Figures from International Data Corporation indicate that GCC Q2 mobile phone shipments fell 9.9%, year on year, and 2.1% over the quarter to 5.8 million units; smartphones recorded their fifth straight quarter of declines and have posted a 14.3% fall over the past twelve months. The decline was felt more in the UAE where annual smartphone shipments were 10.9% lower, with the overall mobile market off by 8.8%. Three companies accounted for 75% of the smartphone market – Samsung (34.2%), Apple (24.3%) and Huawei (16.5%).

Latest figures from the Emirates NBD PMI indicate that the index dropped 0.8 to 55.0 in August, driven by a slowdown in employment and lower stocks of inventories. However, there was some good news, including growth in output and new orders to 63.1, as well as in new work to 57.1. Margins continue to be squeezed which has led to a more focused approach to cost control and job creation being impacted. Because of the fragility of the non-oil private sector, much of the country’s growth this year will be attributable to the rate of government spending and investment, plus net exports.

Emirates Investment Bank is exploring new revenue streams, looking at different sectors – including education, F&B and healthcare – in the GCC. Already this year, the bank has implemented two deals in the healthcare and food sectors and is closely monitoring developments within the regional education network. EIB posted a H1 5.6% profit hike, to just over US$ 7 million.

Having reportedly received offers from the likes of Abu Dhabi Financial Group, Kuwait’s Agility and the US Vistria Group, Actis has chipped in with a cheeky US$ 1 bid for Abraaj Group’s fund unit. The liquidators are also receiving bids for parts of the Dubai-based buyout firm’s business, including Colony Capital for its Latin American operations and Helios Capital Management, interested in some of its African business.

The DFM opened Sunday, 02 September, on 2840, and shed 0.5% to close the week on 2827. Emaar Properties was down US$ 0.01 to US$ 1.36, with Arabtec flat at US$ 0.52. Thursday 06 September saw rising volumes, with trades of 348 million shares, valued at US$ 100 million, higher than a week earlier (184 million shares at US$ 65 million).

By Thursday, 06 September, Brent, having climbed 12.4% the previous three weeks, lost a little ground, down 1.6%, US$ 1.27, to US$ 76.50; gold was US$ 1 lower at US$ 1,204. Over the month, Brent gained US$ 3.39 to US$ 77.64 from its 01 August opening of US$ 74.25, whilst gold headed the other direction down US$ 27 to US$ 1,207.

Opec’s 15-member bloc saw its August production levels hit their highest so far this year, pumping an average of 32.74 million bpd, 1.3% more than a month earlier. This comes after their June meeting, at which it was agreed to push up production levels by 1 million bpd to meet consumer demand and prevent a sharp rise in prices. Libya saw daily levels up 47.0% to 970k bpd, whilst the UAE and Iraq both increased production by 80k bpd, with Iran down 6.4% to 3.5 million bpd.

In a move to cut its debt levels, Norwegian Air is planning to dispose of a number of its planes to make room for the 210 units (from both Boeing and Airbus) that it has committed to acquire before 2020. Of the “new” arrivals, the sixty A320neos are already up for sale. The company expects a 10% increase its fleet size to 165 by the end of 2018 and to 200 over the next three years.

The latest international bank to face the wrath of the regulators is Société Generale which is expecting to be fined US$ 1.3 billion by US authorities over international sanctions violations. The French bank hopes that this will resolve criminal and civil charges in the United States and France for bribing Gaddafi-era Libyan officials and manipulating the Libor interest rate benchmark. This will not impact on future profit streams, as the balance had already been taken into account.

ING has agreed to pay a US$ 780 million fine, and other payments of US$ 117 million, after admitting errors in its policies to stop financial crime over a seven-year period to 2016, during which time some customers were laundering money through their accounts with the bank. The Dutch financial institution admitted that its operations did not “meet the highest standards” and are “taking a number of robust measures to strengthen our compliance risk management”.

As a direct result of the Chinese government clamping down on online gaming, the market value of Tencent sank over 20% last Friday; the 20-year old company accounts for 42% of all games sold in China. The reason behind the decision was the rising level of myopia (near-sightedness) mainly among the young population, attributable to spending too much of their time playing these games. The Education Ministry has directed the publishing regulator, inter alia, to limit the number of new online video games and restrict the time young people spend on such applications. Last month, China’s largest gaming and social media firm blamed the freeze on games for their first quarterly loss in thirteen years; there are concerns for the company that has lost more than US$ 160 billion in market value already this year. But with a third of its 1.4 billion population suffering from myopia, what else can the government do?

On Tuesday, Amazon joined Apple when it became the second US technology firm to be valued at US$ 1 trillion. The company posted a twelve-fold jump in quarterly profits to US$ 2.5 billion and has an ever-increasing employee headcount of 575k.

Switzerland’s Jacobs Holdings is likely to acquire Cognita, one of Britain’s biggest private school operators, in a US$ 2.6 billion deal. It had been on the market for some months and there was plenty of interest including from Nord Anglia Education and GEMS Education, who are both well known in the UAE. The initial plan was to hold an auction, as Cognita, with operations in eight countries, was keen to cash in on strong investor interest in the booming global education sector.

Canada’s Oxford Properties Group seems to have gazumped US private equity firm Blackstone Group, with a last minute (higher by US$ 65 million) US$ 2.4 billion offer for Australian office owner Investa Office Fund. The sale of its twenty-property national portfolio had seen widespread interest and indicates that demand for commercial space continues to be strong and that because of short supply, rents will inevitably go up. The Canadian landlord already owns 10% of Investa and its offer was 3.4% higher than the last traded share price.

Coca Cola has spent US$ 5.0 billion to acquire UK’s biggest coffee chain, Costa, from Whitbread. The leisure group had been mulling over whether to list Costa as a separate entity and there were several other parties, including Nestle SA, JAB Holding Co. and Starbucks Corp, that may have been interested in a deal. Whitbread bought Costa for only US$ 25 million in 1995, when it had only 30 outlets, and has built the brand over the past twenty-three years, now with 2.4k UK shops and already 1.4k in 32 countries, including China. It will use the windfall not only to return a “significant majority” to shareholders but also to prop up the pension fund and expand its Premier Inn chain in the UK and Germany. It will be interesting to see how the new set-up takes up the mantle to challenge the two market leaders – Nestle and Starbucks.

Yet another UK high street retailer is facing problems – this time it is Footasylum. Despite an 18.5% revenue hike over the past six months to US$ 127 million, it has issued a warning that its profits could be 50% lower than initially anticipated because of difficult trading in July and August; the retailer indicated that recent sales had been “more challenging” and there was “no sign of a recovery” on the high street. This week, its shares were trading at more than half of its value which fell to just US$ 54 million.

Meanwhile embattled DIY chain, Homebase, bought by Hilco Capital for just over US$ 1 in May, has gained creditors’ approval to close 42 of its 250+ stores that will now save it from having to cease business. The closures will take place over the next twelve months and lead to job losses of some 1.5k staff. The company, like Carpetright, House of Fraser, Mothercare and New Look in recent times, has used the controversial CVA (company voluntary arrangement) to control rising costs and keep in business, whilst its creditors are often left wearing most of the cost.

In line with other retailers, the smallish UK department store chain, Fenwick is to shed 400 jobs in a bid to restructure and further cut costs, after posting a 93% slump in profits to just under US$ 3 million, not helped by a 3.6% sales decline.

Accor has acquired Movenpick’s 84 hotels, and a further 18 under development, for US$ 559 million. The sale will strengthen Accor’s presence in the Mena region, with the addition of 51 properties formerly managed by the Swiss operator, along with the 18 under development. Europe’s largest hotel company currently has 222 hotels in the region and a further 90 in the pipeline. In recent times, Accor has purchased both the Raffles and Fairmont brands and future acquisitions cannot be ruled out.

July ME air passenger demand grew at an annualised 4.8%, well down on the corresponding figure of 11.2% the previous month – and this at a relatively peak time for the sector. Capacity was 6.5% higher than a year earlier, as the load factor slipped 1.3% to 80.3%. On a global scale, annualised average growth stood at 5.3%, with capacity up 5.5% and load factor 0.6% higher at a record high of 85.2%. The short-term future looks rosy but increasing energy prices may damage airlines’ bottom lines.

A look at three locations shows that their manufacturing sectors all slowed down in August. Some analysts point the finger of blame at the volatile state of the global economy and the introduction of tariffs. In the UK, the PMI dipped 1.0 to 52.8, with growth rate declining and new orders weakening. Most other indicators headed south, including new export business, overseas demand, factory output and pace of employment.

China’s manufacturing PMI was nearing the 50 mark – the crossover from expansion to contraction. At 50.6 (down 0.2 from July’s reading of 50.8), it posted its weakest level in over a year, with exports declining for the fifth straight month as new orders rose at their slowest pace since May 2017. There is no doubt that this sector has lost its momentum and is in a cycle of downward pressure.

Although extending growth for the 62nd straight month, the Eurozone PMI recorded its lowest expansion rate in over two years, registering 54.6, compared to a July figure of 55.1.  Worries about Brexit, trade wars and the impact of tariffs will not go away so the erosion of business optimism in the bloc will continue into the coming months. There is no doubt that consumer demand is cooling, whilst risk aversion is beginning to warm up.

The service sector in China moves up in August albeit at a slower pace, with a PMI reading of 51.5 – a ten-month low and 1.3 lower, month on month. The composite index came in 0.3 lower at 52.0, still above the 50.0 mark which differentiates between expansion and contraction. Meanwhile, Japan’s services sector edges higher and, at a faster rate, at 51.5. With business confidence remaining upbeat, both new business growth and recruitment rose at a faster rate.

Japanese capital spending increased at its fastest quarterly rate in over a decade, with Q2 spending 12.8% higher, year on year – and well up on the 3.4% return the previous quarter. This is a major indicator that points to an upward GDP revision due out next week.

In the UK, the August service sector PMI was 0.8 higher, month on month, to 54.3 and is comfortably placed well above the 50.0 line that marks the difference between contraction and expansion. These figures will come as some relief to the May government following recent poor manufacturing and construction data. It is expected that Q3 growth will be around 0.4%.

Disappointing news for the UK car industry in July when production fell 11.0%, year on year, to 121.1k vehicles, of which 19.4k were for the domestic market, down 35.0%; YTD figures were 4.4% lower at 955.5k. Monthly exports dropped by 4.2% to 101.7k units. The main drivers appear to be consumer uncertainty ahead of Brexit, the introduction of tougher emission standards and model changes.

July consumer borrowing growth was 0.3% lower, month on month, at 8.5% – it slowest pace in almost three years – as the net amount of new consumer borrowing came in at US$ 1.0 billion. This is well below the three year average of US$ 1.9 billion. Mortgage lending at US$ 4.1 billion was flat at 3.2%, whilst net bank lending to non-bank businesses increased to US$ 3.4 billion in July.

Fitch dropped Italy’s BBB rating from stable to negative on the back of a risk that a reversal of structural reforms would impact negatively on the country’s creditworthiness, not helped by political uncertainty. The government had been elected earlier in the year on the promise of massive tax cuts and some form of universal income for the poor; if implemented, the Italy’s debt level would inevitably head north. Its public debt level, at US$ 2.7 trillion, is the highest in the euro area and equates to a worryingly high 130.8% of GDP.

With unconfirmed reports that Goldman Sachs would shelve plans to set up a cryptocurrency trading desk, digital currencies have taken a hit this week. On Thursday, Bitcoin traded 4.5% lower at US$ 6,382 and is slipping to its year low of US$ 5,887. However, the loss was not as bad as other similar currencies that took a real pasting – Ethereum 12% lower, Litecoin – 11%, and Ripple – 7%.

It has also not been a good week for some more traditional currencies. Despite government efforts by President Hassan Rouhanim, the Iranian rial has dropped to record lows, with the dollar worth 138k Rials mid-week – down 8.0% in one day, Tuesday, and YTD 70% lower. This instability will inevitably go on for some time

The Turkish lire continues to plummet and is currently trading at 6.58 lire to the US$ – 42.4% lower than its opening price of 3.79, at the beginning of 2018. Despite its currency problems, Turkey’s economy is set to increase by 3.8% this year – 0.7% lower than expected in July. At the same time, Fitch lowered its forecast for next year from 2.4% to 1.2%, before recovering to 3.9% in 2020. The main drivers behind the slowdown include “policy missteps, heightened financial stress in the private sector, geopolitical tensions and potential capital flight.” The country is also facing increasing inflation levels, now at a 15-year high of 17.9%.

With persistent trade worries and increasing macro concerns, the Indian rupee slipped to new record lows trading at 71.58 to the greenback on Tuesday – and even lower on Thursday to 71.73.

On Wednesday, the rand lost 1.5% and was trading at 15.6 to the US$; since 01 January 2018, trading at 12.4, it has lost 25.8% of its value. South Africa has entered into recession, as its economy contracted by 0.8% in Q2 – its second straight quarterly fall. The main driver was the 29.2% slump in the agriculture sector which took 0.8% off the GDP, as the new Ramaphosa government has still not come to grips with reality and needs to reform and restructure much of the public service.

Many other emerging markets’ currencies can be added to the mix. Brazil’s real, trading at 4.13 to the greenback, has lost 24.8% in value, since starting the year at 3.31. Pakistan and Indonesia have also seen less dramatic YTD falls of 11.5% to 123.12 rupiah and 9.9% to 14,904 rupiah. (Even the Australian dollar, trading at 1.39, has managed to lose 8.6% in value so far this year).

With all the news focussing on the decline of sterling, it is interesting to note that the Euro has lost almost twice as much in value this year than the pound – 6.9% compared to 3.7%.

Even the Archbishop of Canterbury has offered his pennyworth of advice on the UK economy. Justin Welby has come out in support of higher taxes on technology giants and more public spending, citing that the present economy was “unjust”. For eleven years before leaving in 1989, the archbishop worked in the oil industry, with Elf Aquitaine and latterly for five years, as treasurer of Enterprise Oil plc. The energy sector seems to be one that makes high profits and low taxes – a possible case of poacher turning gamekeeper! Whether he is right, God Only Knows.

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