Forever in Blue Jeans                                                        08 Aug 2019

According to the latest Savills report, Dubai has become the third most affordable city in the world for purchasing prime residential property, behind Cape Town and Kuala Lumpur, and the fourth for prime residential rental yields, at 4.6%. The consultancy estimates that Dubai prime prices have dipped almost 20% over the past five years (1.7% over the past decade and 1.6% since January 2019). Dubai’s prime property is priced at US$ 600 per sq ft – a long way off the likes of Hong Kong (US$ 4,730 and New York (US$ 2,520).

On 25 July, Damac Properties decided to introduce registration fees for external vendors and contractors as well as maintenance companies, including a US$ 5.44 fee for workmen and cleaners entering its buildings. After much consternation, plus resistance from residents and owners, this week the decision was reversed by the developer, although it will still proceed with a registration process.

Azizi Developments has launched a new retail division to add 329 shops to its growing portfolio of Dubai properties; all the outlets are located in its master-planned communities and residential towers. Azizi Retail will operate the units, of which 177 are located in Azizi Riviera, 70 in Al Furjan and 42 in Healthcare City, with the balance in other of its developments.

With its new Ibn Battuta store, Landmark Group’s Centrepoint hopes to combine both the online and offline retail segments. The First Store of the Future, covering 42.3k sq ft, will introduce modern features, such as digital interfaces and LED screens, along with mobile cashiers and dedicated personal stylists on-call in the store to assist customers.  The new outlet will also have a coffee station and a dedicated mother and baby room. The parent company is planning to add a further eleven outlets across the region that would bring its total retail space to 6.6 million sq ft.

The Indian state of Maharashtra officially launched hyperloop, as a public infrastructure project, becoming the first such project in the world. The government approved a DP World-Virgin Hyperloop One consortium to run the operation that will see the travel time between Mumbai and Pune reduced by at least 85% to just over thirty minutes; it expects that by 2026, passenger numbers will have almost doubled to over 130 million on this route alone, with tickets  aligned to typical rail – rather than plane – prices. Hyperloop speeds will top 1k kph.

There was disappointing news for Dubai’s cruise sector, as P&O Cruises cancelled its planned Dubai and Arabian Gulf programme from October until at least March next year, citing security concerns, following the recent tanker attacks around the Straits of Hormuz. The operator confirmed that all bookings would be cancelled, and guests given a full refund. Earlier, and before this announcement, figures showed that over the past 2018/2019 cruise season, Mina Rashid Cruise Terminal welcomed 846k cruise visitors on 152 ship calls – up from the previous year’s 559k on 110 calls – equating to a 51.4% hike in visitor numbers and a 38.2% rise in vessels. It was reported that an additional 211 ship calls had already been confirmed for the upcoming 2019/2020 season, starting in October. Over the past five years, since its inauguration, the Dubai terminal has received over 2.3 million visitors.

Dubai Aerospace Enterprise signed three agreements to raise US$ 490 million in funds to finance its ambitious expansion plans. Only last month, DAE, the region’s biggest plane lessor, raised a US$ 440 million syndicated bank loan. The 13-year old company’s fleet, at December 2018 year end, comprised 354 aircraft, valued at about US$ 14 billion; last month it announced that it had delivered and committed to deliver US$1.1 billion in aircraft assets during H1.

In June, Dubai’s Department of Economic Development issued 2.4k new business licences that generated almost 7.6k jobs; of the total, 58.5% were for professional services and 38.9% commercial. During the month, 22.8k registration and licensing transactions were completed. The top five nationalities securing licences were Bangladeshis, Indians, Pakistanis, Egyptians and British.

The Dubai economy is being hit from all sides so much so that the current slowdown can largely be attributable to external factors. This week, IATA indicated that ME carriers posted the sharpest declines in freight volumes globally in June, driven by escalating trade tensions and business uncertainty. Year on year, regional freight volumes were 7% lower. Likewise, the slowdown in global trade will have a negative impact on Dubai’s maritime sector. A strong greenback makes Dubai more expensive for most overseas visitors and this – allied with most countries posting lower growth – does not help the emirate’s tourism sector. Then there is the fall in energy prices and the last thing Dubai wants is to see Brent oil at US$ 57.38. If the government could dictate the price of oil, unfettered world trade and a weaker dollar, Dubai’s woes would soon go away.

However, June ME passenger numbers rebounded 8.1%; this followed a May lull (0.6%) attributable to the month-long Ramadan. Overall, growth has not been as strong as last year because of rising economic uncertainty and on-going US/Chinese trade tensions. Capacity was up 1.7% and load factor jumped 4.5% to 76.6%.

The UAE’s Federal Authority for Government Human Resources has declared a holiday for Eid Al Adha, officially beginning on the 9th of the Zul Hiijah and lasting until the Zul Hijjah 12. Both public and private sector workers will have a four-day break from this Saturday to Tuesday, 13 August.

The popularity and importance to the Dubai economy of the public transport system continues unabated, with latest H1 figures showing a 6.5% passenger ride increase to 296 million. In the first six months, March and January were the busiest, being used by 53.2 million and 51.7 million respectively. The three more popular modes of transport were the Metro, taxis and buses accounting for 34% (101.7 million), 30% (87.8 million) and 27% (79.3 million) of the total respectively. The balance was made up of e-Hail and smart car rental – serving 17.7 million – marine transport (7.2 million) and Dubai Tram (3.2 million).

Still on bail in London, awaiting US extradition hearings, disgraced founder of the Abraaj Group, Arif Naqvi, has been sentenced in absentia to three years in prison by a UAE court; the case involved a loan with low-cost carrier Air Arabia, of which he was a director.

Struggling Union Properties posted a Q2 loss of US$ 23 million (compared to a US$ 7 million profit in the same period in 2018); US$ 8 million of the deficit was attributable to a loss in the value of financial instruments held by the firm but the main factor was that its total of direct costs, finance costs and general and administrative expenses of US$ 44 million exceeded its US$ 29 million revenue stream which in itself was 15.5% lower, year on year. Looking at H1 returns, revenue was down 13.0% at US$ 57 million, with the developer posting a loss of US$ 22 million, compared to a US$ 57 million profit a year earlier. Its share value on Thursday was at US$ 0.093 – down 15.0% YTD.

DXB Entertainments posted a Q2 loss of US$ 63 million (10.1% lower than in 2018), as revenue dipped 5.4% to US$ 30 million, despite a 10% jump in visitor numbers to 641k. The theme-parks operator has not made a profit since its DFM listing in 2014 but hopes to reach break-even by H2 2020. It is reported that recently appointed CFO, Paul Parker, is leaving the company. By Thursday, its shares were trading at US$ 0.06 (down 4.4% YTD).

Emaar The Economic City, operating in Saudi Arabia, posted a 119.6% increase in H1 losses to US$ 27 million (H1 2018 – US$ 7 million), driven by higher financial costs and launching new operating assets; gross income was up 8.2% to US$ 56 million. Most of the damage was done in Q2, as a Q1 profit of US$ 3 million turned into a Q2 loss of US$ 31 million.

Emaar’s Egyptian unit, Emaar Misr for Development, posted a disappointing 91% fall in H1 profit to US$ 6 million compared to US$ 67 million over the same period last year; sales also headed south – down 17.1% to US$ 88 million. On a quarterly basis, Q1 posted a 16.8% decline in profits to US$ 25 million but deteriorated in Q2 to a US$ 19 million loss – from a Q2 2018 profit of US$ 55 million.

Emaar Properties posted a 3.1% decline in H1 profit to US$ 847 million, as revenue fell 4.0% to US$ 3.2 billion, driven by the double whammy of declining revenue and rising costs. By 30 June, the developer estimated a US$ 13.4 billion sales backlog, which will help drive revenue over the next four years, and that H1 sales, at US$ 1.7 billion, were up 52% over the same period in 2018; it also has a land bank of 1.6 billion sq ft.

Emaar Development recorded a 23.3% decline in H1 profit to US$ 376 million, as revenue fell 11.0% to US$ 1.7 billion. However, the developer, majority-owned by Emaar Properties, indicated that with a US$ 10.2 billion sales backlog, it will result in “remarkable revenue recognition” in the coming three to four years. In H1, sales were 50% higher at US$ 9.4 billion, as it launched sixteen new projects, totalling US$ 8.8 billion.

Meanwhile, Emaar Malls saw its H1 profits 3.0% higher at US$ 308 million, as revenue grew 6.0% to US$ 607 million. Its retail portfolio – including Dubai Mall, Dubai Marina Mall and Souq Al Bahar – maintained an impressive 92% occupancy level whilst footfall came in 2% higher at 68 million. 59.1% of the division’s revenue (US$ 359 million) emanated from its hospitality & leisure, entertainment and commercial leasing business. When combined with the revenue from Emaar Malls, its contribution to the group’s top line was US$ 965 million – or nearly 32% of the total; the group’s international operations contributed US$ 475 million (a 12.5% increase on a year earlier).

Commercial Bank International reported a 49.4% slump in H1 net profit to just US$ 11 million, although operating profit came in 5.2% higher at US$ 56 million. The main drivers were a 13.7% decline in operating expenses, to US$ 48 million, with net income/commission up 6.9% to US$ 29 million. Its Capital Adequacy Ratio in H1 2019 remained stable at 14.7%.

The bourse opened on Sunday 04 August at 2900 and having gained 239 points (9.0%) over the past month gave back 62 points (2.1%) to 2838 by 08 August 2019.  Emaar Properties closed down US$ 0.04 at US$ 1.44, with Arabtec US$ 0.03 lower at US$ 0.45. Thursday 01 August witnessed low trading conditions of 194 million shares, worth US$ 64 million, (compared to 115 million shares, at a value of US$ 46 million on 01 August). The bourse will be closed next week until Wednesday because of the Eid Al Adha festival.

By Thursday, 01 August, Brent, having gained US$ 1.27 (1.9%) the previous fortnight, entered bear territory, shedding US$ 4.67 (7.5%) to US$ 57.38. Gold, having gained US$ 30 (2.1%) the previous week, went US$ 66 better, trading US$ 4.6% higher on Thursday at US$ 1,510.

For a company that has never made a profit, it was no surprise to see Uber’s Q2 loss widening to a record US$ 5.2 billion, (compared to US$ 878 million a year earlier); the main driver was a US$ 3.9 billion of share-based compensation expenses, related to its stock market listing earlier in the year. It also posted a 147% increase in costs to US$ 8.7 billion, as the company spent an increasing amount in R&D. Although revenue rose 14.4% to US$ 3.2 billion, Uber’s growth slowed in face of heavy competition. Its shares slumped 13% in after-hours trading.

Honda posted a 29.5% decline in Q2 profits to US$ 1.6 billion, as revenue dipped 0.7% to US$ 37.0 billion, driven by disappointing sales in the US and India, along with an unfavourable currency exchange. Consequently, it lowered its profit forecast (for the year ending 31 March 2020) by 3.0% to US$ 6.0 billion which would still be 5.7% better than last year’s US$ 5.7 billion return. The Japanese automaker expects to sell 5.1 million vehicles and 20.0 million motorcycles this fiscal year.

Japan’s SoftBank Group posted a 257.6% hike in its first-quarter net profit to US$ 10.5 billion, attributable to delayed gains of US$ 8.0 billion, from its 2016 sale of Alibaba shares. Q1 sales to June (Japanese companies tend to have a 31 March year-end) rose 2.8% to US$ 21.9 billion, whilst operating profit dipped 3.7% to US$ 6.5 billion. The company is fast becoming more of an investment firm, than just a software entity, and last month said it would be involved in an US$ 109 billion investment fund with other tech firms, including Apple and Microsoft.

The day HSBC announced a 15.8% rise in H1 pre-tax profit to US$ 12.4 billion, and plans to cut staff numbers by 4k, its chief executive, John Flint, was surprisingly ousted from his position.It seems that he disagreed with chairman Mark Tucker who indicated that the bank needed a change in leadership to address a “challenging global environment”. The bank expects that the retrenchments will cost US$ 650 million in severance pay, with the same amount being saved on future annual payrolls.

In the UK, Tesco announced that it expects to retrench some 4.5k staff from its 153 Tesco Metro stores in its latest round of redundancies. Recognising that it was operating in an increasingly competitive and challenging retail environment, the supermarket giant indicated that it wanted stores to “serve shoppers better” and help to “run our business more sustainably”. Tesco, which employs about 340k, plans to introduce a “leaner” management structure, “faster and simpler” ways of filling shelves and staff working “more flexibly”.

There was a 1.4% fall to US$ 1.7 billion in the value of summer signings (compared to last season) before the EPL deadline expired at midnight. The three biggest spending clubs were Manchester United, Aston Villa and Everton paying US$ 177 million, US$ 160 million and US$ 152 million for new players. In regard to net spending (the balance between what was paid for new players and what was collected for exiting ones), the top three were Aston Villa, Arsenal and Manchester City (US$ 160 million, US$ 157 million and US$ 129 million). The bottom of the league in net spend were Chelsea, Crystal Palace and Liverpool with negative totals of US$ 79 million, US$ 49 million and US$ 12 million. Arsenal’s Alex Iwobi’s move to Everton, at US$ 41 million, was the biggest incoming EPL deal; Romelu Lukaku’s US$ 90 million deal from Manchester United to Juventus was the largest outgoing transfer.

Governor Shaktikanta Das did not surprise the market with a rate cut but did by the unconventional 35 basis points which saw the repo rate at 5.4%; this was the fourth rate reduction this year by the Reserve Bank of India, as concerns about the country’s economy mount. The RBI reduced its 2019 growth forecast by 0.1% to 6.9% – ambitious after Q1’s 5.8% and estimates that Q2 could be lower – and, with inflation remaining muted, but within its target range, more rate reductions are on the cards.

Other countries also decided that rates were too high in the current economic environment. New Zealand’s central bank decided to cut its rate by 50 bps – a rate that no analyst expected. It now stands at a historic low of 1.0% – the same rate as its neighbour, Australia.  On the back of New Zealand’s surprise move, the Aussie dollar slid to a decade-low of 66.77 to the greenback; a day earlier the RBA had kept rates on hold. This followed the Bank of Thailand surprising the market by cutting its benchmark by 25 bp – its first rate reduction since 2015 – whilst the Philippines also cut bank rates by 0.25% to 4.25%.

June average household spending in Japan posted a 2.7% year on year increase to US$ 2.6k, following a 4.0% rise the previous month; the average monthly household income jumped 3.5% to US$ 8.3k. Initial results for July saw the country’s service sector almost flat – but still registering growth –  with the Jibun Bank Services PMI 0.1 lower at 51.8. There are worrying signs that the economy is slowing, maybe to a recession, as the overall composite output index dropped 0.2 to 50.6, with job creation and demand rising but at a marked lower pace. With two main indicators pointing down – the leading index, which measures the future economic activity, by 1.6 to 93.3, and the coincident index, reflecting the current economic activity, 3.0 lower to 100.4 – the writing is on the wall. As relations with South Korea worsen by the day, and the imminent sales tax increase on the horizon, the economy is likely to move in one direction – and that is down.

Typical of most governments, Australian legislators are seen to be dragging their feet over the 76 recommendations emanating from the Hayne banking royal commission on the shady dealings of the country’s financial sector. Six months ago, and after a year in operation, it came up with 76 recommendations. To date, only seven have been acted on, two of which were to do nothing – keeping APRA and ASIC, and not amending the consumer credit laws. The conclusions also sought to act speedily by tough legislation, quick fixes and ensure better sector behaviour; unsurprisingly, the opposite has happened and there is every chance that some will never be implemented within the next five years. To the outsider, it looks as if the establishment has joined ranks to look after their own interests at the expense of the public good.

Expanding for the fourth straight month, the IHS Markit/Chartered Institute of Procurement & Supply services PMI increased by 1.2, month on month, to 51.4 in July; the main drivers behind the figures, that surprised the market, was a renewed increase in new work and weaker sterling helping to improve foreign demand. There was a slight easing in the rate of job creation as some businesses noted increases in payroll costs and fuel.

In contrast to a relatively strong services sector, UK manufacturing headed in the other direction – with production at a seven-year low. Overall, the economy is just keeping its head above the recession level, as July’s results were one of the worst months since the 2009 GFC. No wonder that, after a reasonable start to the year, the wheels are beginning to come off; the UK will be lucky to see a GDP growth of any more than 1.0% this year.

However, the euro area private sector is in an even bigger mess, as both the manufacturing and service sectors PMIs headed lower month on month in July – by 0.7 to 51.1 and 0.4 to 53.2 respectively. In typical Brussels fashion, blame is attributable to every factor possible, ranging from slower economic growth to geopolitical concerns and everything in between. Germany continues to be badly hit, expanding at its slowest rate in six years, with manufacturing output spiralling downwards and service sector growth slowing; the country’s final composite index fell 1.7 to 50.9 and moving inexorably to below 50 which will signify contraction.

A separate survey from IHS Markit showed that the June Eurozone construction PMI fell marginally by 0.2 to 50.6. Although France’s construction PMI rose 0.6 to 52.4, both Germany and Italy headed into contraction territory, with readings of 49.5 and 49.8 respectively.

In the US, July non-farm payrolls increased by 164k, down on the 223k monthly average attained in 2018 but still well above the estimated 100k required to maintain continuing growth in the working-age population. It is evident that the trade war with China is taking its toll especially on manufacturing (as production declines for the second straight quarter). With business investment also contracting, Q2 annualised growth of 2.1% was down on the 3.1% posted in Q1. With wage growth remaining moderate (average hourly earnings up US$ 0.08 – 0.3%), inflation, at 1.6%, is below the Fed’s 2.0% target; this could see another rate cut over the next six weeks.

This week, US/Chinese trade troubles took a worrying turn for the worse, with the yuan falling to just under 7 to the US$ – its lowest level in a decade. It was a studied move by the People’s Bank of China to limit the impact of the next round of tariffs. Using his Twitter account, President Trump lambasted China accusing it (maybe with some justification) of currency manipulation; Bank of China governor, Yi Gang immediately responded that  China would not use the yuan as a tool to deal with trade disputes, whilst President Xi Jinping upped tensions by requesting state-owned companies to suspend imports of US agricultural products. Consequently, the world’s stock markets and emerging market currencies went into a tailspin, with the main beneficiaries, at least in the short-term being gold, Japanese yen and US Treasury bonds.

Following a by-election defeat, Boris Johnson’s parliamentary majority has been cut to one and there is every chance that he is preparing for an early general election at the same time as readying the people for a 31 October Brexit. Since his elevation to the highest position in the land, he has continued to court the electorate by promising US$ 2.2 billion for the NHS, hiring 20k more police and boosting infrastructure spending, including on railways.

A BBC report on UK shopping habits has unearthed some surprising facts including that the British buy five times more clothes than they did in the 1980s and more than any of their European neighbours. Because of globalisation, and production in poorer countries, customers have more choice and lower prices. There is no doubt that after the 2014 fire in Bangladesh, that killed over 1.1k garment workers, the big retailers were forced to take action to improve terms and conditions. As wages moved higher in the country, the search was on for alternatives including Ethiopia where US$ 7 a week is about a third of the current rates in Bangladesh.

Apart from the human cost, questions need to be asked about the environmental damage. There are plausible claims that textile production contributes more to climate change than aviation and shipping combined which can be seen at all six stages of a clothing item’s life cycle – sourcing, production, transport, retail, use and disposal.

For example, when it comes to cotton, it is estimated that a single shirt and a pair of jeans can take up to 20k litres of water to produce. If that figure is staggering, then what about a polyester shirt made out of virgin plastics? This has a much larger carbon footprint and even more when dying fabrics and transporting come into the equation. At the other end of the cycle, a single washing machine load can release hundreds of thousands of microplastic fibres into waterways which then may end up in the food chain. Finally, a million tonnes of clothes are disposed of every year in the UK, 20% of which ends up as landfill.

The government, that has already suggested introducing more sewing lessons in schools (?), may have to look at an environmental tax on clothing; this may help in one way but, with the state of the UK high street and the need to boost consumer spending, it is unlikely to have much traction. With clothing demand forecast to rise by the equivalent of 500 billion t-shirts over the next decade, the obvious solution is to buy less and not to be Forever in Blue Jeans.