Make The Money                                                      05 September 2019

In an on-line letter, HH Sheikh Mohammed bin Rashid Al Maktoum addressed his “brothers and sisters” in a six-point document. One of his most interesting points was directed at government officials who he said belong “in the field” and “we want to see them there and hear from them among the people rather than in conferences that have increased and consumed resources and the energy of those in charge…we are a government of achievements and not a government of conferences.” He was also critical of social media users and urged them not to tarnish the efforts and accomplishment of the UAE, whilst reminding them that “we have a Ministry of Foreign Affairs and International Co-operation, responsible for managing our external affairs, speaking on our behalf and expressing our position on foreign policies.”

He also pointed out that Emiratisation is a “priority of the new season”, more so because Emiratis account for only 0.5% of the private sector (and 60% of the public sector). He also reemphasised that “providing jobs for Emiratis was and remains a priority”. He also indicated that the country is to become more competitive on the global stage, adding that “we are not a country that moves according to the average economic rates. We are a country that seeks to make economic leaps.” Who needs Tony Robbins when it comes to motivation?

In a busy week, he was among a crowd of over “10k aspiring leaders and positive change makers at the biggest motivational event in the region.” He was attending lifestyle guru, Tony Robbins’ ‘Achieve the Unimaginable’ event and also tweeted “gathering a crowd of 10k is just the beginning to lead societies towards a better future. We have more to come.”

HH Sheikh Mohammed Bin Rashid Al Maktoum also issued directives to form a Higher Real Estate Planning Committee to try and equate the supply/demand conundrum seen in the emirate’s realty sector. He is keen to bring about a right balance between supply and demand, avoid launching similar real estate projects and ensure projects add real value to the national economy. Part of its strategy would be “to ensure that semi-government real estate companies do not compete with private investors”, as well as “to develop a comprehensive strategic plan and vision for all major real estate projects”. It also aims to ensure that real estate projects are not duplicated and to avoid competition between big developers and small private investors.

So far this year, Sobha has racked up sales in excess of US$ 272 million and expects to double that number by the end of the year, if the strong investor interest, in its flagship project Sobha Hartland, continues; compared to the same period in 2018, sales are up 165%. Interestingly, Chinese sales account for 36.5% of the total. The property developer is planning a 2022 IPO of its local business unit, dependent perhaps on it meeting its ambitious revenue and profit forecasts of US$ 680 million and US$ 110 million.

There has been a 2.1% hike in the number of hotel rooms in the final phase of the development pipeline in the ME with, as usual, the UAE, streets ahead of its neighbouring countries. A STR study indicates that the pipeline comprises 427 projects, accounting for 124k rooms of which the UAE has over 54k (31.8%) of the total.

Its seventh premium luxury Address Hotels + Resorts property was unveiled by developer Emaar Properties. Located in Downtown Dubai, the three tower, 193-key Address Fountain Views will open next month; a link bridge will connect it with Dubai Mall.

Emaar has confirmed that it has appointed banks, including Standard Chartered and Emirates NBD, to assist with the potential issuance of US$ Islamic bonds, (probably a ten-year sukuk), an integral part of its US$ 2 billion debt raising programme.

This week it has also launched Ease by Emaar, a property management service that allows investors to seamlessly rent their Emaar property short-term as a holiday home. The company will charge a. 20% management fee, whilst the owner will have to pick up all other expenses, including government and booking fees.

It already has properties in its portfolio, as the new initiative may well boost the realty sector. Strangely, a day after this announcement, Emaar announced a rather abrupt end (as from 19 September) to all holiday-home visits in Downtown Dubai, citing that this was the result of “several requests and resident complaints on disturbances and related inconveniences due to holiday home operations.”

According to Mastercard’s Global Destination Cities Index 2019, Dubai maintained its position as the fourth most visited global city, with almost sixteen million international overnight visitors. Once again, Dubai visitors spent more (US$ 553) on a daily average, with a total spend for the year at US$ 30.8 billion, than any other of the two hundred cities surveyed. The next three – Makkah, Bangkok and Singapore – were way behind, with totals of US$ 20.1 billion, US$ 20.0 billion and US$ 16.6 billion.

The emirate welcomed more than 1.4 million passengers over the last two weeks of August, of which 260k (18.6%) utilised the 75 smart gates.

It is reported that Dubai Airports “is currently reviewing its (Dubai World Central) long term master plan to ensure infrastructure development takes full advantage of emerging technologies”. It seems that plans for what would have been the world’s biggest airport are being pushed back. There were hopes that following phase one, DWC would be able to handle 130 million passengers. Currently, even though it can handle 27 million, total passengers last year came in at 900k.

In the light of the imminent demise of its workhorse, the Airbus A-380, and a slowdown in the global economy (which is inevitably a cyclical event), Emirates is reviewing its future fleet requirement. The airline, basing its fleet around the Airbus super jumbo and the Boeing 777, has become the world’s largest international carrier. Now it has to consider that the market may be changing and that some locations may be better served by smaller planes. Emirates has reportedly still to sign off on a US$ 21 billion order, for thirty A350-900s and forty A330-900neos, made earlier in the year. It is also to restrict the number of A-380s to 123 after RR could not guarantee their engines’ price and fuel efficiency. It will be interesting to see what order the local carrier makes at this November’s Dubai Air Show.

Emirates has revamped some of its top hierarchy this week, with Adnan Kazim appointed as CCO, replacing Thierry Antinori, who abruptly departed some four months ago. Other appointments saw Adel Al Radha, as the new chief operating officer, leading all operational departments in the airline, and Shaikh Majid Al Mualla as divisional senior vice president for international affairs.

Emirates Cuisine Solutions is a new entity following a JV agreement between Emirates Flight Catering and Washington DC-based Cuisine Solutions. This will see Dubai host the world’s largest halal sous vide manufacturing facility. (Sous-vide is a cooking method in which food is placed in a plastic pouch or a glass jar and cooked in a water bath for longer than usual cooking times at an accurately regulated temperature). Distribution of these specialised food items will start this month, whilst the manufacturing facility will be ready by 2022.

There was a big fall in August’s IHS Markit’s PMI which saw the index decline to an eight-year low down, month on month, by 4.9 to 51.6. Despite this dip in business conditions, driven by increasing market competition, it is still above the 50 mark that is the threshold between expansion and contraction. It was also noted that activity in the non-oil economy increased “at a notably softer rate”, with weaker demand biting into any expansion and prices continuing to be discounted. Companies maintained their vigilance when hiring, with employment numbers, in the non-oil sector, remaining in the doldrums.

One sector that seems to defy the local economic conditions is banking, with the Central Bank releasing figures showing that the sixty UAE-based institutions received a total of US$ 5.8 billion in commissions last year; national banks accounted for 82.8% of the total. In 2018, the profits of UAE banks rose by 12.0%, year on year, to US$ 11.6 billion. With total banking assets topping US$ 780 billion, the UAE maintained its banking sector’s position as the largest in the Arab world. The Central Bank also revealed that eligible liquid assets totalled US$ 112.8 billion.

S&P expects Dubai economy to expand by 2.4% this year (2.0% – 2018), driven by a slight rise in economic activity, with stronger growth expected next year on the back of Expo 2020 and the completion of related infrastructure projects, along with increased tourist numbers. The ratings agency expects average 2.5% growth until 2022 but the downside could arise from the real estate sector expected to post a further price 10% decrease this year. Meanwhile, the country will see growth at 2.6% next year (up from 1.7% in 2018), with Dubai’s non-hydrocarbon sector contributing about 70% of its real GDP.

August saw the DGCX post average daily volumes totalling 146.5k – 55% higher than the same month in 2018 – and actually had its highest ever daily volume of 220k on 05 August. As usual, the best performing asset class during the month was the Indian Rupee, specifically Rupee futures which links the Indian currency to the US$. It seems highly likely that continuing geo-political tensions will benefit the Dubai exchange – as investors search for new hedging tools – so much so that by the end of the year it should have overtaken its previous annual volume of 22.3 million contracts.

On Monday, Emirates NBD, 55.8% owned by the Dubai government,  raised the cap on foreign ownership, from 5% to 20%, and saw its shares, quoted on the DFM, jump 15% limit up to its highest level since 2007; it is considering doubling this to 40% in the near future, as well as raising its capital base to US$ 2.0 billion from a new share issue. Money raised will help to pay some of the US$ 2.6 billion spent on its recent Turkish acquisition, Denizbank AS. The bank also confirmed that it raked in US$ 376 million, with its April sale of a 10.5% stake in Network International which floated on the London Stock Exchange; it still retains an 11.9% shareholding. There is every chance that, by early next year, Dubai’s largest bank could be included in the emerging market benchmarks compiled by MSCI and FTSE Russell. Since the beginning of September, its share value has shot up 19.5% to US$ 3.76.

The bourse opened on Sunday 01 September and regained most of the 141 points (4.8%) shed the previous four weeks, jumping 122 points (4.4%) to 2891 by 05 September 2019. Emaar Properties, having lost US$ 0.08 the previous three weeks, nudged US$ 0.01 higher to close on US$ 1.36, with Arabtec flat at US$ 0.44. Thursday 05 September witnessed low trading conditions again of 143 million shares, worth US$ 95 million, (compared to 159 million shares, at a value of US$ 45 million on 29 August).

By Thursday, 05 September Brent, having gained US$ 3.70 (6.4%) the previous three weeks, was US$ 0.76 (1.1%) lower at US$ 60.32. Gold, having gained US$ 29 the previous week, ended on Thursday 05 September US$ 10 (0.7%) lower at US$ 1,537.  Silver ended the week at US$ 18.82 – up 17.5% from its 01 January opening of US$ 16.02.

For the month of August, Brent lost ground, shedding US$ 5.17 (9.0%) to close the month at US$ 59.25 but was well up YTD having gained US$ 5.45 (10.1%) from its year opening balance of US$ 53.80 to close at US$ 59.25. Meanwhile, gold astounded the market, with monthly gains of US$ 104 (7.3%) and YTD US$ 235 (18.3%) to close August on US$ 1,520.

American Airlines has followed the example of others, including United, South West and Air Canada, to remove the troubled Boeing 737 Max from its schedule until at least December. The aircraft manufacturer is confident that the US Federal Aviation Administration will conduct its Max certification flight next month, more than seven months after the model was grounded worldwide on 13 March, following two crashes within five months that killed 346 people. However, some global civil aviation authorities have complained that Boeing has yet to provide technical details about modifications to the Max’s flight control computers and this could delay its return into the new year.

In the UK, the Restaurant Group, that acquired Wagamama last year, has indicated concerns that some of its restaurants are considered to be in unfavourable locations. Having identified 76 Frankie & Benny’s restaurants in March, they have now highlighted that a further 42 (mainly Chiquitos) are in line for possible closure for the same reason. The future of each outlet would be reviewed when their lease expired. Although total H1 sales were 58.2% higher at US$ 620 million, the company posted a US$ 106 million loss, driven by a US$ 139 million write down in the value of restaurant sites seen as being “structurally unattractive”. Its share value dipped 14% on Tuesday when the details were published.

Last Friday, shares in Shoe Zone sank by over 30% after a double announcement that it expected profits to be less than initially forecast and its chief executive, Nick Davis, would leave immediately to “pursue other business interests”. The retailer, with 4k employees and 550 stores, is but the latest High Street name to hit the buffers, as reports indicate that the number of empty shops in the UK reached its highest rate in four years and shopper footfall declined by 1.9%.The retailer also revealed that its 17 freehold properties were worth US$ 4 million less than expected. Its future strategy will see it focus more on online and larger out-of-town stores.

The Australian supermarket sector is in for a major shake-up, involving the entry of a largely unknown German powerhouse Kaufland, backed by the fourth biggest retailer in the world, Schwarz Gruppe. It first announced that it would open three stores earlier in the year and now has twenty ready to open in Victoria and South Australia, prior to moving to NSW. It is expected that the expansion will result in 2.4k jobs and that Victoria itself will benefit by a US$ 350 million investment made in outlets, HQ and a distribution centre. Not only other big players – including Coles, Woolworths and even its compatriot Aldi – will feel the pinch but also the likes of Big W, as well as Wesfarmers’ Kmart and Target, because the German interloper also houses a full line of discount department store goods. Kaufland operates big – its stores are usually fifteen times bigger than an Aldi, five times bigger than a big Coles or Woolworths, and stocks 40k different stock items (compared to Aldi’s 1.3k average).

It is no surprise to see yet another of Australia’s larger banks in court. This time, Westpac is facing a class action by potentially thousands of their superannuation members, claiming that they have been short-changed out of retirement savings for more than a decade. The case involves two of the bank’s subsidiaries – Westpac Life and BT. The latter, (even though funds were meant to be invested directly into a low-risk “cash-only” fund), is accused of shifting its superannuation members’ funds to the former which then transferred them to an external fund, thus ramping up fees. It is then thought that Westpac Life “pocketed” half the returns.  It seems that Westpac Life had earned “reasonable returns” (of 2.5%) but decided to only pass on 1.3% to members. The compensation claim could cost the bank tens of millions of dollars – and because it is an “open class action”, any investor is automatically included as plaintiffs.

Australia posted its first quarterly current account surplus (of US$ 4.0 billion) since June 1975 (when January’s ‘Never Give Up’ was number one in the charts) on the back of big trade surpluses driven by booming iron ore prices and a lower Australian dollar. The current account deficit used to average about 4% of the country’s GDP but this figure had risen to US$ 16.1 billion by 2015. Subsequently, it has been slowly whittled down to finally attain positive status. Meanwhile, the RBA has kept the cash rate at a historic low 1.0% following consecutive 0.25% cuts the previous two months but expect a further reduction probably in November. The dollar (US$ 0.682) is hovering around decade-long lows.

It is a hard fact of economic life that Australia’s good news derives a lot from Brazil’s Vale iron ore mine disaster in January that saw 300 people killed and the facility closed. Consequently, Australian miners, including Rio and BHP, cashed in as iron ore prices rose from US$ 72 a tonne to US$ 122, before dipping to US$ 90.72 by Thursday; even at this level, it is still 65% higher than the US$ 55 a tonne forecast by Treasury for the current financial year. The fact that for every US$ 10 over the US$ 55 forecast price generates US$ 3.7 billion for the federal budget may well be masking that the Australian economy is not performing as well as it first appears.

This week, Argentina introduced currency controls, limiting bank withdrawals to a maximum of US$ 10k without formal approval. This move comes with the country facing a deepening financial crisis, resulting in the value of the peso slumping. The Macri government, which is likely to fall from power in next month’s elections, has also approached the IMF to defer debt repayments. Argentina, where in 2018 alone, three million more fell into poverty, has posted a H1 inflation rate of 22%, as its economy contracted 5.8% in Q1, following a 2.5% decline last year. Whether this compares with the other four debt defaults, that the country has faced in the past thirty years, remains to be seen.

August’s IHS Markit/CIPS PMI saw UK manufacturing activity slumping to its lowest level in seven years, as the index dipped, month on month, 0.6 to 47.4. With new orders dropping at their fastest rate in seven years, and business confidence at a historic low, the blame has been apportioned to the usual two main suspects – the global economic downturn and uncertainty around Brexit.

In what many considered to be an election budget, there is no doubt that new Chancellor Sajid Javid splurged out, declaring that the Johnson governmenthad “turned the page on austerity”. With what was a budget, with the fastest increase in spending for fifteen years, the government will spend US$ 16.5 billion across the board including the NHS, education and the police (with an additional 20k new police being recruited).The budget was overshadowed within hours when Prime Minister Boris Johnson lost his majority in the House of Commons with Phillip Lee’s defection to the Liberal Democrats. More bad news followed when rebel Tories and Labour MPs passed a bill to stop the UK leaving the EU on 31 October without a deal and the PM failed in a bid to hold a snap general election on 14 October. Sterling had fallen to US$ 1.206 but recovered to close on Thursday at US$ 1.225 – another missed opportunity for those with dirhams or dollars to exchange.

Despite the ever-increasing noise about an imminent recession, driven by the year-long trade war between the United States and China, August US private payroll figures continue to move northwards, with an increase of 195k monthly jobs, up from July’s figure of 142k. However, despite the obvious strength in the labour market, and the fact that the US economy is in its 11^th straight year of expansion, there are genuine concerns that global trade issues will eventually have a negative economic impact. On those grounds, there will almost certainly be a further interest rate cut later in the month, two months after the last one.

As options contracts expired at the end of the month and low liquidity pervaded the market, the euro sank below US$ 1.10 for the first time in over two years last Friday and weekend worries about tariffs and possible Hong Kong unrest. Even Donald Trump was tweeting about the fact that the strong dollar was costing his country exports revenue to the bloc. There are expectations that the ECB could well cut rates to below zero as well as introduce a new stimulus package. If you can get a near-zero loan, it could be time to fill your boots – otherwise, yet again, it is time for the banks to Make The Money.