Wake Up Time                                                          09 May 2019

Three separate reports this week seem to indicate that the turnaround in the Dubai economy may have started. Driven by new publicly-funded investments, and higher energy prices, the IMF pointed to a “turning point” which will also see an additional “Expo boost”; the world body is forecasting a 2.0%+ growth this year and 3.0% in 2020. The economy has recovered well from two years ago when the growth was at 1.7% – not helped by weaker external demand and intensified geopolitical tensions.

Another positive indicator came from the Department of Economic Development announcing it had issued more than 2.8k new licences in April – 60% up, year on year; the agency estimated that this added an additional 8.4k jobs to the Dubai employee numbers. Two sectors dominated, with professional and commercial sectors accounting for 49.0% and 48.1% of the total. April business registration and licensing transactions totalled 29.8k – a 13% growth.

The latest Emirates NBD Dubai Economy Tracker Index was also the bearer of positive economic improvements in Dubai, with business conditions advancing at their fastest pace in four years; the main drivers behind these figures were a boost in new business and an improvement in wholesale and retail sector activity. The composite index moved 0.3 higher to 57.9 and, for the fourth straight month, was above its long-run trend level of 55.2. However, discounting, that has continued, with prices falling for the twelfth straight month, masks the real problem that there has been no actual improvement in underlying demand. On the plus side, the level of incoming new business, at 66.6, increased at the fastest rate since January 2015, new sales growth at wholesalers and retailers hit a record high of 70.8, while construction firms registered 55.7 – its strongest level this year. However, employment in the non-oil sector remained flat at a disappointing 50.0 – the threshold between expansion and contraction.

JW Marriott Dubai in Deira will close its doors next week due to “circumstances” beyond the control of the hospitality group. The four-star hotel’s management has reported that events had “interfered with our ability to continue to operate the hotel.”

Q1 figures show that Dubai attracted 4.75 million visitors, 2.2% higher than the same period in 2018. The top four source countries continue to be India, Saudi Arabia, the UK and China (up 13%), with numbers of 565k, 412k, 327k and 292k respectively, accounting for 35.3% of the total; surprisingly, Oman came in fifth as numbers from the emirate’s neighbour climbed 27%.

By the end of March, the emirate’s hotel room portfolio was 8% higher at 118k encompassing 717 establishments; of that total, luxury five-star properties continue to dominate with 34%, four-star account for 26%, and one-three star 19%, with the remaining 21% taken by hotel apartments.  Occupancy continues to be high on a global scale at 84%.

There was a 2.2% decline in Q1 passenger traffic (22.2 million) at Dubai International, attributable to the late timing of Easter, compared to 2018, and a reduction in flights as flydubai’s Boeing 737 Max aircraft remain grounded. Cargo traffic was 4.1% higher at 641k tonnes.

April’s UAE’s purchasing managers’ index (PMI) recorded its highest reading (at 57.6) since December 2017, as business conditions improved, driven by higher output, increasing at its fastest rate in over four years, and new work. However, just as in Dubai, with discounting still driving sales (and reduced margins), hiring is still flat and there has been no apparent improvement in job expansion. Furthermore, with weak wage growth, household consumption remains in the doldrums. One ray of light saw business optimism reaching a series high in April, as the future output index climbed to 90.8.

There are reports that twelve-year old Dubai-based Arqaam Capital Ltd and Abu Dhabi’s The National Investor could merge, creating a business with an equity value of US$ 250 million. If the deal were to go through, it is expected that Arqaam investors would retain managerial responsibilities, along with a 40% share. Financial institutions are leading the way forward in the region with consolidations that, in theory at least, lead to reduced costs and increased market share.

Driven by its biggest ever fuel bill and a strong greenback, Emirates posted a 69% year-on-year decline in profit to US$ 230 million, although revenue was 6.0% higher at US$ 26.7 billion. Operating costs jumped 8.0%, with its fuel bill spiralling 25% higher at US$ 8.4 billion, equivalent to 32% of total costs (28% a year earlier); the strong dollar cost the airline a further US$ 147 million. Over the year, Emirates passenger numbers remained flat at 58.6 million but with seat capacity increasing by 4%, fare increases resulted in a 3% hike in passenger yields.

The group, which also includes Dnata, posted a 44% decline in profits to US$ 626 million, with revenue 7.0% higher at US$ 29.8 billion; its year end cash balance fell 13.0% to US$ 6.0 billion. Dnata itself saw revenue 10.0% higher at US$ 4.0 billion (of which 70% came from its ever-expanding international business), resulting in a profit of US$ 381 million, inflated by a one-time gain from its divestment in the travel management company Hogg Robinson Group; when this one-off transaction is taken out, profit would have declined by 15%. It is expected that the group’s parent company, the Investment Corporation of Dubai, will receive a US$ 136 million dividend.

Dubai Aerospace Enterprise, owned by the Investment Corporation of Dubai, posted a 3.1% increase in Q1 profit at US$ 99 million, as revenues rose 2.2% to US$ 360 million. The Middle East’s biggest aircraft lessor, having acquired Ireland’s Awas in August 2017, is now one of the top ten global jet lessors, with 301 owned aircraft and 52 managed jets.

Drake & Scull International confirmed that it was being investigated by a forensic audit committee formed by the UAE’s Securities and Commodities Authority for “floundering financial position and accumulated losses”. Some files, relating to questionable projects between 2009 and 2016, are currently being reviewed. Furthermore, the federal public prosecutor is still studying fifteen legal complaints, alleging offences by members of the company’s previous management. Last month, DSI, which has incurred losses of US$ 1.6 billion over the past two years, terminated both the CEO and CFO and this week saw the departure of its chairman, Obeid Bin Touq, and a director, Khamis Buamim.

Amlak’s fortunes have not improved in Q1, as it posted a 71.4% slump in profits to just US$ 1 million on the back of a 24% hike in revenue to US$ 33 million which included an unrealised fair value gain related to investment properties. The Sharia-complaint home financier, with Emaar its main shareholder, also booked a US$ 12 million impairment. It hopes that 2019 will see improved economic conditions, that would boost its revenue stream, and that it will be able to finalise restructuring its debt; it had previously reorganised its US$ 2.8 billion investment deposits and settled US$ 769k in cash with financiers in 2014, before revising the terms of the 12-year deal in 2016.

Impressive Q1 results were posted by Emaar Properties with a 7.2% hike in profit to US$ 463 million, on the back of a 123% jump in booked sales to international clients at US$ 708 million and quarterly revenue 53.0% higher at US$ 1.6 billion. By 31 March, its sales backlog was 3.5% higher at US$ 13.2 billion, which fares well for future dividend prospects.

Meanwhile, its development arm, Emaar Development, recorded a healthy 51.0% jump in revenue to US$ 910 million, with profit coming in at US$ 204 million. In Q1, the developer launched eight new projects with a value of US$ 1.2 billion, as its total sales backlog increased to US$ 10.3 billion. Interestingly, sales to non-UAE residents accounted for over 45% of total sales.

Although Dubai Investments saw a 44.2% slump in Q1 profits to US$ 55 million, it was not as bad as it looked compared to the same period in 2018 when the figure was inflated by a US$ 91 million overall gain on the acquisition of a stake in Emirates District Cooling. Its total assets nudged 2.9% higher at US$ 5.5 billion. Its share value dipped 2.14% lower to US$ 0.337.

The bourse opened for trading on Sunday 05 May, at 2758, and, having shed 29 points (1.0%) the previous week lost a further 85 points (3.1%) to close by Thursday, 09 May, on 2673. Emaar Properties dropped US$ 0.06 to close the week on US$ 1.23.  Arabtec, having shed US$ 0.03 the previous week, lost the same again and by Thursday closed on US$ 0.53. Thursday 09 May, saw similar trades to the previous week at 89 million shares, valued at US$ 33 million, compared to a week earlier of 90 million shares at US$ 42 million.

By Thursday, 09 May, Brent, having dropped US$ 3.60 (4.8%) the previous week, lost a massive US$ 9.05 (12.8%) to close on US$ 61.70; gold reversed its recent downward trend – up $ 15 to US$ 1,285.

The downward trend in ME air cargo activity continued into March, with a cargo increase of 1.3%, offset by a 3.8% jump in capacity, driven by weakening volumes both in and out of North America and Asia Pacific. Capacity growth has now outstripped demand growth for 11 out of the last 12 months. Although an improvement on February’s return of a 4.9% contraction, it is still 1.5% lower on an annualised basis.

Driven by a marked improvement in its Asian operations, along with lower costs (down 12.0%), HSBC posted a 30.5% hike in Q1 profit to US$ 6.2 billion – and this despite a dismal performance from its investment banking sector and the drag of its US business. Cost reduction was helped by one-off sales in its retail and commercial businesses and the non-recurrence of US regulatory fines for past misdeeds.

Siemens is set to slash its workforce by 10.4k in a major restructuring programme which will involve the spinning off its oil, gas and power generation business and cutting costs in the region of US$ 2.7 billion. The German industrial equipment maker has been under pressure due to a broader trend toward renewable energy such as sun and wind power in a sector that has seen its global rivals, General Electric and Mitsubishi, struggling as well. The company is expected to maintain a significant stake of less than 50% in the spun-off company and hold a majority stake in its renewable energies company.

Uber Technologies Inc priced its initial public offering at the low end of its targeted range, valuing it at US$ 82.4 billion, after seeing rival Lyft losing 23% in value following its March entrée into the market. The company hopes to raise US$ 8.1 billion tomorrow, 10 May, after offering 10% of its shares at US$ 45 each. Only last year, analysts were expecting a valuation north of US$ 120 billion. Whether the company can deliver this amount remains to be seen and tomorrow will see what happens on the New York bourse.

BMW posted a 78.0% decline in earnings before interest and tax to US$ 673 million, with the automotive division reporting its first loss in a decade, as legal provisions over alleged collusion on cleaner car emissions climbed to US$ 1.6 billion. To improve both revenue and profitability streams, BMW announced a US$ 16 billion savings strategy that would see culling models and cutting development time; in H2, it will also introduce a new 3-Series and a X7 SUV. With Donald Trump once again using the tariff threat on China, the German car maker expect earnings before tax to fall “well below”, year on year, while deliveries will rise slightly – this would see return on sales drop to between 4.5% – 6.5% from an already lowered target of 6% – 8%.

At last, Debenhams’ creditors have agreed a plan that will see the closure of fifty stores and rent reductions for others. Having rejected all takeover bids for the struggling firm, UK’s biggest department store chain, with 166 shops and 25k staff, is still owned by Celine, a consortium of the retailer’s lenders.

A six-year-old New York company has been bought by the owner of Wilkinson Sword for US$ 1.4 billion. Harry’s is an on-line retailer of men’s razors, as well as face washes, lotions and women’s products and revolutionised the sector by selling goods direct to consumers via subscription. In its short history, it has captured 2% of the global US$ 2.8 billion men’s shaving industry.

A decade later, Didier Lombard, the ex-boss of France Telecom (now Orange) and six other former executives have gone on trial in Paris, accused of moral harassment. At that time, in 2008, the French telecom was cutting 22k jobs, whilst retraining a further 10k. The tough measures then taken have been linked with 35 staff suicides at the time – some of whom left messages blaming the callous actions taken by management. M Lombard was quoted as saying “I’ll get them out one way or another, through the window or through the door”. The surprising factor in this story is that, if found guilty, the defendants can only face one-year imprisonment and a US$ 18k fine and Orange a fine of only US$ 90k.

To those who thought that Trump would not get past first base and that Brexit was only a pipedream comes the news that Bitcoin has passed the US$ 6k level – 90% higher than its December 2018 value but some way off its artificially high 2017 mark of US$ 19k. However, Binance, one of the largest cryptocurrency exchanges in the world, lost US$ 40 million this week when hackers withdrew 7k Bitcoins.

Having already returned US$ 57 million, (used to fund the blockbuster The Wolf of Wall Street), to Malaysian authorities, the US is to remit a further US$139 million in relation to illicit funds from the 1 Malaysia Development Berhad fund (MDB). The sovereign wealth fund was set up in 2009 to boost Malaysia’s economy, through strategic investments, but US$ billions worth of money was illegally used, including US$ 4.5 billion that ended up in the US. The country’s former prime minister, Najib Razak, and his wife, Rosmah Mansor, are facing charges of corruption. including pocketing US$ 681 million from 1MDB.

As it strives to reduce its budget deficit and debt levels, Bahrain will receive a further US$ 2.3 billion from a 2018 US$ 10 billion five-year support package provided by its Gulf Arab allies – Saudi Arabia, UAE and Kuwait. The package has helped the Kingdom slash borrowing costs and restore investor confidence, so much so that it is now planning to sell bonds later in the year.

Despite all the negative economic news surrounding Brexit, April UK house prices were up 5.0%, year on year – its highest level in two years and better than the 2.7% recorded last month; it was also 1.1% higher compared to March. The news from mortgage lender Halifax seems to be in contrast with other indicators and appears to reflect factors such as unusually weak April prices, increased sales of more expensive newly built homes and a bigger proportion of London sales, where house prices are above average. Recent Bank of England data indicates that mortgage lending was at its lowest level since December 2017 and that consumer borrowing had slowed sharply in the run-up to the original Brexit deadline of 29 March.

Even without the problems surrounding Brexit, the UK economy has once again confounded critics as the UK April services sector expanded by 0.5 to 50.4, after recording its lowest level in March in 32 months. With subdued domestic consumer and business spending, new business decreased for the fourth consecutive month, as exports continued to head south – as it has for the past eighteen months – with European demand flattening. However, the composite Index jumped 0.9 to 50.9, as the manufacturing sector improved with the IHS Markit/CIPS UK Construction Purchasing Managers’ Index, or PMI, rising to 50.5 from 49.7 in March.

In April, Chinese exports dipped 2.7% (after a mega 14.2% expansion the previous month), whilst imports headed in the other direction – up 4.0%, compared to a March contraction of 7.6%. This resulted in a US$ 13.8 billion trade surplus – with that with the US up US$ 0.5 billion to US$ 21.0 billion, as both exports and imports declined – by 13.0% and 26.0% respectively.

In a bid to support companies struggling, amid an economic slowdown, China has cut the reserve requirement ratios (RRRs) for 1k small and medium-sized banks to 8%; currently, the rate is between 10% – 11.5%. This should release more than US$ 41 billion in long-term funding that will boost the country’s SMEs. The cut comes at the same time as Donald Trump sharply escalated trade tensions between the world’s two largest economies, threatening to raise tariffs on US$ 200 billion of goods from 10% to 25%, starting as early as tomorrow – Friday 10 May.

Donald Trump is doing something right with the April US unemployment rate falling to its lowest level for more than 49 years, as the jobless rate fell 0.2% to 3.6%. Impressive figures showed that 490k joined the work force in April and that the average earnings grew at an annual rate of 3.2%. The number of people working part time, because their hours had been reduced or because they were unable to find full-time jobs, remained at 4.7 million. As good as the figures were, it is unlikely to prompt the Fed to consider hiking interest rates.

At the start of the week, the President’s mind was on China but by Wednesday he had moved his attention to Iran. His predecessor, Barrack Obama, had signed a deal with the country but on the anniversary of him pulling out of the “horrible” accord, the US deployed an aircraft carrier strike group and nuclear-capable bombers to the area, accusing Iran of “imminent” attacks. He also threatened to introduce further sanctions on the mining industry as Iran retaliated with threats – aimed at other five parties to the 2015 agreement, (China, France, Germany, Russia and the UK).

The RBA has finally faced reality – that Australia’s economy is to go through a rough patch and it will have to cut interest rates sooner rather than later. In February, it indicated that the country’s economy grew 2.75% last year only to downgrade that to 2.3% this week. Last November, it was hoping that 2019 growth would be 3.35%, only to reduce that to 1.7% for the year ending 30 June. Better late than never, for the lucky country that has never witnessed a recession for three decades, it’s Wake Up Time!