Suspicious Minds                                                               02 May 2019

HH Sheikh Mohammed bin Rashid Al Maktoum was in Beijing this week, attending the Belt and Road project, at which China’s President Xi Jinping tried to ease concerns, promising to ensure transparency and the “fiscal sustainability” of all projects. Some critics are concerned that China is trying to exert its geopolitical influence which has already seen some countries becoming indebted to the world’s second largest economy. The initiative is expected to have a final investment of over US$ 1 trillion and has already chalked up some mega infrastructure work in several countries. Sri Lanka has already had to hand over control of one of its ports to repay China some of its foreign loans.

Following HH Sheikh Mohammed Bin Rashid Al Maktoum’s visit to the country there are plans for China to invest in two Dubai-located trading facilities. A US$ 2.4 billion investment will see the building of a sixty million sq ft (5.6 million sq mt) facility, that will be used to store Chinese products for shipping around the world. DP World has also signed an agreement for a US$ 1 billion project to import, process, pack and export agricultural, marine and animal products. These two investments should benefit both parties – it will enhance China’s influence in the Gulf region and will boost regional and international trade.

The Dubai Ruler also unveiled a federal Ministry of Possibilities, a new branch of government, with the “unconventional” ministry functioning “without a minister” but with input from the whole cabinet. He stated that “the virtual ministry, administered by the cabinet, will address pressing national portfolios and build future government systems.” In its first phase, it will oversee the Department of Behavioural Rewards to develop an approach for incentivising positive behaviour through a point-based “rewards” system.

Following Sheikh Mohammed’s displeasure at the service level of some government services, the Ministry of Human Resources and Emiratisation has penalised nine Tasheel government service centres and revoked the license of another. The crackdown followed an investigation into slow service by the Dubai Ruler after he received an anonymous complaint, with a photo, of long queues at an Emirates Post branch. He tweeted that “I received this picture through an anonymous shopper with regards to the level of service at Emirates Post… This is not our level… or our service… and those who continue to provide this level of service will not remain within my team…”

HH Sheikh Mohammed also approved several infrastructure projects on Tuesday, including a 380 mt long, 60m high “sky garden” footbridge, soaring across Dubai Creek, featuring cycling and running lanes and shops. It will connect the redeveloped Al Seef area in Bur Dubai across to the Deira side of the Creek. Other developments include new bike-sharing schemes, beachfront areas and three new promenades.

The 2.5km Sheikh Zayed Road promenade, linking DWTC and the Financial Centre, will feature green spaces for walking and cycling. The second, “sunset promenade”, at Jumeirah Beach Walk, will include several floating islands, with a total 107k sq mt beach area. The “Umm Suqeim promenade”, linking the Mall of the Emirates and Madinat Jumeirah, will comprise a 110 mt pedestrian bridge above Jumeirah Street, including more cycling and running lanes.

The bike scheme, to be managed by the RTA and Careem, will include the provision of 3.5k bicycles at 350 separate locations around the emirate. Users will be able to rent bikes with their credit cards, metro cards or smartphone apps.

More details about these exciting initiatives will be announced in the coming months.

Damac awarded US$ 120 million worth of contracts in Q1, 41% of which were for their master development, AKOYA, 16% for work at Damac Hills and 12% for the completion of the four-tower Damac Towers by Paramount Hotels and Resorts.

Yet another mega development was announced this week which involved two of Dubai’s biggest players – Emaar and DP World (through its subsidiary P&O Marinas). The developer is to use land made available by the ports operator to regenerate an area around Mina Rashid. The Riviera-style coastal development will include residential and the likes of an elite waterfront retail, dining and leisure destination, a floating yacht club (with 430 berths), a sandy beach of over 12.6k sq mt and Dubai’s longest swimming pool. Mina Rashid will also have ‘signature’ hotels, a private beach club, interconnected parks, a 500 mt palm tree-fringed canal, art galleries, a theatre and a museum. Sirdhana, the first residential units for sale, will be launched shortly.

The latest Creek Harbour development was unveiled this week – Creek Edge. Comprising two towers – 40- and 20-storey structures – they will house 560 1-3 B/R apartments, with a very limited collection of waterfront duplex townhouses on the podium level. Located near the premium luxury Address Harbour Point Hotel, as well as the Ras Al Khor Wildlife Sanctuary, it will have a wide range of leisure and recreational facilities.

It is reported that the Dubai Land Department is studying a proposal that would see residential and commercial rents frozen for three years, once a lease agreement has been signed by both landlord and tenant. Nearby Sharjah has already implemented such a scheme.

The Andaz Dubai The Palm will open in Q4 this year following an agreement between the hotel operator and Wasl Asset Management Group; it will be Hyatt’s second branded property in the UAE, following in the steps of Andaz Capital Gate Abu Dhabi. The twin-tower, 15-storey beach-front building will house 217 guestrooms and 116 serviced apartments, along with four restaurants. Hyatt will also open another branded hotel a year later – Hyatt Centric La Mer Dubai.

The 25-year old Jumeriah Group boasts nineteen overseas properties and expects a further nine more before the end of 2020; these will include two in China – in Guangzhou and Hangzhou – one in Bali and others in Italy and France. Owned by the Ruler’s investment arm, Dubai Holding, the hotelier has not forgotten its local roots and is currently developing Marsa Al Arab, a four million sq ft leisure and hotel development on two man-made islands near the Burj Al Arab; completion is expected by 2022. Longer term, it is considering an ultra-luxury brand – The Burj Collection – which would be exclusive global properties built in the manner of its Dubai flagship, the Burj Al Arab.

Dubai becomes the fourth global location – after London, Berlin and Milan – for Warren Buffet’s Berkshire Hathaway Home Services real estate brokerage firm; only six years old, it boasts 1.45k offices in the USA and has 50k advisers. The firm will focus on property above US$ 870k and is confident of success in a market that has seen steady growth in the number of overseas buyers.

Details of some ticket prices for Expo 2020, were released this week, including a one-day pass for US$ 33 and a three day one for US$ 71; more ticket options will be made available later. The site will host pavilions from 192 countries and will have 22 performance venues, hosting 60 different events each day over the six-month period. International travellers will also be able to purchase tickets through hotel, airline or tour operator bundles, with details currently being finalised.

Emaar Malls recorded a 7.0% hike in Q1 net profit to US$ 159 million on the back of a 4.0% increase in revenue to US$ 300 million, helped by the input from its newly acquired e-commerce retailer, Namshi; there were also strong returns from its shopping malls portfolio, including Dubai Mall and Marina Mall. The unit of Dubai’s biggest listed developer Emaar Properties also posted strong occupancy levels touching 92%, with a 3% rise in visitors to 36 million, of which 22 million visited Dubai Mall.

At this week’s Arabian Travel Market, flydubai’s CEO reiterated that the airline remains confident in the Boeing 737 Max aircraft model and that it is still committed to its Boeing orders. However, Ghaith Al Ghaith, said the financial impact of that grounding may be “significant” if it lasts much longer, with 17% of the airline’s seats being affected by the groundings.

HH Sheikh Ahmed bin Saeed Al Maktoum, the carrier’s chairman indicated that flydubai, is in talks with both Boeing and Airbus. The former in relation to seeking compensation for its grounded 14 737 Maxs and the European manufacturer about its A320 Neo narrow-body model in the absence of a timeframe for the return of the troubled Maxs to the skies. Sheikh Ahmed said he hoped the aircraft would be in operation “soon” and “that it’s safe to fly” but commented that Boeing’s communications to its customers, about its software upgrades for the jet and pilot training, “could be better.”

Also, at the Arabian Travel Market, Emirates finally confirmed that it would be introducing a premium economy class for both the its new A380 planes and its new Boeing 777 jets. Sir Tim Clark, president of Emirates, also indicated that ticket prices would be “well below business class fares.” Not many details were made available, but it will have sleeperettes, rather than fully lie-flat beds, and will offer more legroom, along with enhanced food and beverage services.

According to Visa’s latest UAE Travel Snapshot, cardholders spent US$ 6.2 billion (up 4%) in 2018, when visiting the UAE, as the number of transactions climbed 22%. Despite a stronger greenback, which makes the dirham more expensive, the country still continues to be an attractive tourist attraction. Saudi visitors remained the biggest spenders, accounting for 21.5% of the total, at US$ 1.3 billion, followed by the USA, UK and China.

Last month saw the cost of Special 95 jump 9% and yesterday the May price rose a further 10.9% to US$ 0.707 per litre. Diesel prices fared a lot better with only a 1.6% increase to US$ 0.689.

Having earlier forecast 3.6% growth last October for the UAE, the IMF has downgraded its 2019 outlook to 2.8%, as well as cutting its 2018 figure from 2.9% to 1.7%; next year, growth is expected at 3.3% driven by a 4.0% expansion in the non-oil sector, assisted by Expo-2020 spending. The wider GCC bloc is expected to see 2.1% growth this year, slightly up on the 2.0% seen in 2018. Lower domestic liquidity growth has arisen because of pressures from tighter global financial conditions which has resulted in net regional capital outflows.

Notwithstanding negative currency fluctuations, Aramex turned in a 4.0% hike in Q1 profit to US$ 29 million, on the back of a similar revenue increase to US$ 327 million; the percentage revenue would have doubled to 8% if it were not for weaknesses in the Australian dollar, Libyan dinar and the rand, which cut the bottom line by US$ 3 million.

Dubai-based Deyaar Development posted a 54.6% decline in Q1 profits at US$ 5 million, although revenue was only 0.4% down at US$ 48 million. The developer, majority owned by the Dubai Islamic Bank, is hoping for a better 2019, as it will hand over several projects, including the Millennium Atria Business Bay hotel and units from Afnan and Dania districts of its Midtown mega development. It also plans to launch its second hospitality development – the Millennium Al Barsha.

The bourse opened for trading on Sunday 28 April, at 2787, and, shed 29 points (1.0%) to close by Thursday, 02 May, on 2758. Emaar Properties, having lost US$ 0.11 the previous three weeks, was flat at US$ 1.29.  Arabtec shed US$ 0.03 to close on US$ 0.56. The last Thursday before the start of the holy month of Ramadan, 02 May, saw reduced trades of 90 million shares, valued at US$ 42 million, compared to a week earlier of 233 million shares at US$ 56 million. Over the month of April, the bourse was 132 points (5.0%) higher at 2767, with both Emaar and Arabtec down US$ 0.02 at US$ 1.31 and US$ 0.56 respectively.

By Thursday, 02 May, Brent, having traded US$ 6.53 (8.0%) higher the previous month, shed some of that gain this week by closing US$ 3.60 lower (4.8%) at US$ 70.75; gold also headed south again, losing US$ 10 to US$ 1,270. In April, Brent gained US$ 3.50 (5.1%) to US$ 71.60 whilst gold went the other way, down US$ 10 (0.8%) at US$ 1,272.

Australia has witnessed some sort of retail history, as Ikea moves away from its traditional giant out of town warehouse model, opening its smallest store in the world. The first opened in Warringah’s Westfield Shopping Centre and, at only 100 sq mt, is a world away from the traditional Ikea floor space area of 37k sq mt. The Swedish furniture retailer is set to open a further twenty such Australian locations over the next twelve months.

Although widely expected, it was still as shock to see Samsung Electronics report a 56.9% fall in Q1 profits to US$ 4.3 billion (its lowest since Q3 2016), as the global chip market weakened, driven by slowing demand and increased competition. The world’s biggest smartphone and memory chip maker is rapidly losing market share, as the likes of Huawei can make and sell similar products at lower prices; the Chinese rival is now the second largest chip maker in the world surpassing Apple. Another South Korean company, SK Hynix, the world’s second-largest memory chip maker, saw profits nosedive 67%.

With Q1 revenue coming in 17% higher at US$ 36.3 billion, Alphabet’s profit slumped 29% to US$ 6.7 billion, with earnings taking a US$ 1.7 billion hit from an EC fine over alleged abuse of its dominance in internet search, advertising and its mobile system. The market reacted badly with Google shares falling 6.1% to US$ 1.208k, after revenue was not as high as expected. Over 80% of the revenue came from its lucrative advertising platform but the company had losses on its “other bets”, including the Waymo self-driving car project, Verily life sciences and services for internet for remote parts of the world and drone delivery; losses for this sector climbed to US$ 858 million.

Another tech giant going well is Spotify returning a quarterly profit of US$ 106 million on the back of a 33% hike in revenue to US$ 1.7 billion, as the music-streaming entity reached 100 million paid subscribers for the first time; shares climbed 5% on the news. Even now, its subscriber base is twice as much its nearest rival Apple, with the gap expected to grow even further as recent launches in the ME, North Africa and India start to make an impact; already, it has over one million unique users in India across its free and premium tiers, only one week after its release.

The latest tech unicorn planning to go public is the fast-growing office-sharing start-up WeWork, that could be valued at US$ 47 billion. The nine-year old company, a leader in the co-working space sector, has filed documents for a stock market listing to help fuel further expansion plans. It has hundreds of thousands of customers from individual entrepreneurs to major companies, requiring either temporary or permanent office space; among its investors is SoftBank which placed US$ 2 billion with the company earlier in the year.

There is no doubt that US sanctions, as well as its curtailing of the country’s oil exports to zero, are making lives miserable for many Iranians, as its economy sinks deeper into recession. Its inflation rate has almost quadrupled over the past two years from its 2017 level of a manageable 9.6% to its current 37.2%. The country’s economy contracted 3.9% last year, with an even worse scenario set for 2019, not helped by Washington’s decision not to renew waivers that were initially granted to eight nations importing Iranian oil when they expire today, 02 May. Last year, the rial hit record lows, losing 60% in value to the greenback, and the loss of oil revenue has cost the country in excess of US$ 10 billion in revenue.

It seems that the Australian economy, which has not seen a recession in well-nigh thirty years, is finally set to hit the buffers. Q1 saw the country’s inflation rate at zero – a sure sign that all is not well in the lucky country. Deflation will result in a reduction in spending as people wait for prices to fall further and this has a knock-on effect that will soon see unemployment levels head north. The RBA has been targeting an inflation level around the 2-3% level but has failed and now sees stymied growth. When there are other signs of economic weakness – such as falling house prices, weak wage growth and a much too high 8% underemployment rate – then is the time for some drastic action. One would be to cut interest rates which are already at record lows of 1.5%. The other is the bazooka approach and the government to bring in a much-needed stimulatory fiscal policy which would include tax cuts, increased public spending on infrastructure and the like, along with higher pensions/welfare payments.

The eurozone economy continues to disappoint as an EC report noted another fall in its economic sentiment index down 1.6 to 104 in March. All this week’s indicators headed south, including the industrial confidence index down to -4.1 from -1.6, (with expectations for a -1.7 reading), the consumer confidence index lower at -7.9 from -7.2 and the business climate indicator declining 0.12 to 0.42.

The latest Commerce Department indicated that the Q1 US economy fared better than expected, expanding by 3.2% (following 2.2% the previous quarter) – and much higher than the 2.1% forecast by analysts. The main drivers were exports, up 3.7%, and imports falling 3.7%. It will be interesting whether this growth spurt can be maintained but it will silence critics who have been forecasting a major slowdown for some months. Another positive indicator was manufactured durable goods which were 2.7% higher.

Yesterday, 01 May, the S&P 500 hit record highs, with 61% of the listed companies (305) having already posted Q1 results with 76% (232) of that number beating market expectations. One of the best performers of the day was Apple – jumping 6.4% after announcing that Chinese sales were steadying as well as a US$ 75 billion company share back. The current buoyant state of the US economy has also helped push the stock market higher.

Despite the President‘s protestations, the Fed kept rates on hold this week, with borrowing costs remaining at between 2.25% – 2.5%. Donald Trump was hoping for a reduction to just 1% which he said would see the US economy “go up like a rocket” and, if the Fed cut interest rates “with our wonderfully low inflation, we could be setting major records”. However, it is becoming increasingly likely that there will be no further cuts in 2019, with the Fed indicating that global economic risks had moderated; indeed, economic data – especially from China and Europe – has shown marked signs of improvement, with progress being made over the trade tariffs issue.

Meanwhile the Bank of England maintained its rate steady at 0.75%, with its governor, Mark Carney, stating that increases could be “more frequent”, if the economy performs as the Bank of England is expecting; so, if there is a Brexit resolution of sorts, as well as inflation and growth moving higher, rate hikes will result. Currently, the market expects but one rate increase over the next eighteen months.

A leaked report claimed that in a top-secret meeting, the UK government had had agreed to allow Huawei limited access to help build Britain’s new 5G network, amid warnings about possible risks to national security, with three of its main allies, US, Australia and New Zealand warning that the Chinese firm was a security risk. Now the Chinese ambassador to the UK, Liu Xiaoming, has come out saying that “countries of global influence, like the UK, make decisions independently and in accordance with their national interests”. Apart from the security aspect of allowing a Chinese state-like company to help build the new network, is the fact that one of the five ministers present must have leaked the information. On Wednesday, the finger pointed to the Defence Minister, Gavin Williamson. He has subsequently denied he was responsible for any leak, although he did acknowledge an 11-minute call to a Daily Telegraph reporter, minutes after the secret meeting. No wonder there are many around with Suspicious Minds.