The Lights All Went Out In Massachusetts                                                28 May 2020

According to Property Finder, and despite the Covid-19 economic impact, there were still 1.8k property sales last month, worth US$ 1.0 billion, of which 70% were off-plan and the rest in the secondary market. JLL estimates that 12k units were handed over in Q1, as average sale prices came in 7% lower, year on year, on concerns that there is an oversupply of properties in Dubai.

One developer moving forward is Kleindienst Group, confirming that the first occupiers of villas in their Heart of Europe project in Dubai’s World Islands will move in by year-end. The development of the World Islands was completed as long ago as 2003 and handed over to various developers five years later. Kleindienst is also developing two hotels, Portofino and Cote D’Azure, together with 1.5k rooms, sea-horse villas, now selling at over US$ 5 million, and ten ‘palaces’, with private beaches, that have all been sold. One of the more expensive properties, already bought for US$ 27 million, is a beach palace on ‘Sweden Island’. Currently, there are a reported 1.2k workers on site in the process of completing the two hotels, as well as building hundreds of smaller villas and apartments.

Accor expects the local hospitality sector to bounce back slowly – taking between 18 to 24 months – once airline schedules are returned to pre-Covid-19 levels, driven by pent up demand from both business and tourism sectors. The French hospitality group notes that the UAE will be the quickest in the MENA region to return to 2019 levels because of its resilience and that the emirate has always been a touristic hotspot and business hub. Dubai’s hospitality sector has probably been hit as hard as any other in the world when all travel came to a complete standstill because of enforced lockdowns and travel restrictions. According to the World Travel and Tourism Council, there will be a US$ 2.1 trillion loss in tourism revenue and about 75 million global jobs will be lost in the sector. Accor has already closed 67% of its 5k properties worldwide, of which 350 are in the MENA region, and has furloughed, or temporarily laid off, 200k or 75% of its staff. The company, whose brands include Raffles, Fairmont, Sofitel, Ibis and Mercure, has 64 UAE properties, with a further thirty to be added over the next three years.

Dubai tourist chiefs will be closely watching Spain to see whether they can lean any valuable lessons when it opens up the country to foreign visitors in July. The government there has agreed not to introduce a 14-day quarantine, as has been the case in the UK. Spain relies so much on tourism, which provides more than 12% of its GDP, that opening up the economy, despite the risks involved, was seen as an economic necessity. Last year, the country attracted 80 million visitors, many of whom were from the UK; currently once such visitors return from Spain, they will have to self-isolate for fourteen days. Unfortunately, the same rule would apply to UK holidaymakers coming to Dubai which would have a negative impact on numbers who would have otherwise chosen the emirate as their vacation choice. The flip side of the coin would see the usual high number of UAE visitors to the UK drop significantly, as they have to isolate for two weeks on their arrival to the UK. No wonder business groups are petitioning the Johnson government to amend these regulations, suggesting a more “targeted, risk-based” approach.

There has been no change to petrol prices for June, as May prices had remained flat, following a 10% decline in April. Special 95 and diesel pump prices will retail at US$ 0.491 and US$ 0.561 respectively. The stations will welcome the increase in business, as lockdown restrictions are beginning to ease and some sort of normality is returning to everyday life.

Still pleading his innocence, following the collapse of NMC Healthcare, its founder, BR Shetty has indicated that because his UAE bank accounts have been frozen, he cannot pay salaries for some of his companies, including Neopharma and others. He seems to be admonishing banks for “without proof, they have taken this action” to freeze his accounts, even though NMC was placed into administration, with debts of US$ 6.6 billion owed to more than eighty lenders, of which US$ 2.0 billion is due to UAE banks. Mr Shetty is blaming seventeen ex-staff members – with their details forwarded to local authorities – for involvement in siphoning money, including share sales and equity collar transactions carried out in his name that generated a reported US$ 500 million over a two-year period. Another group company, and also listed on the London Stock Exchange, Finablr, that also owns UAE Exchange, has had its shares suspended since March, after it was found that previously unreported debts of US$ 1.0 billion had been discovered.

As it continues to maintain its confidence in the sector, Yellow Door Energy is planning to raise a further US$ 100 million in debt finance, partly because of an estimated 18% reduction in 2020 revenue, attributable to the pandemic. The Dubai-based company, with interests in Bahrain, Egypt, Jordan and Saudi Arabia, still expects to have about US$ 110 million of projects operating come the end of 2020, as well as to reach 100MW of capacity, with 55MW under construction. The five-year old company, spun off then by solar energy investor Adenium Energy Capital, has investors, including the International Finance Corporation, Mitsui & Co and Norway’s Equinor Energy Ventures. Although global bodies, such as the World Economic Forum, are worried that Covid-19 might be a catalyst to slow down the drive to clean energy growth, the company is confident that business will remain on track, as it continues to focus on existing markets. Currently, it has three on-going projects in Pakistan and is “actively looking for new investments”.

A decade after a significant project had been completed, Union Properties has lodged a claim that “is related to construction work for a significant project that was completed around ten years ago”. Surrounded by a little bit of mystery, the concerned parties – a UP subsidiary and an entity that carried out the work – have yet to be named, as is the project concerned. However, what is known is that an arbitration process, to recover about US$ 409 million, has been initiated by a UP subsidiary. The company also announced that it will not “spare any effort in pursuit of the collection of the amount owed, and is taking the proper legal procedures, which are in the interests of the company’s shareholders”. In 2019, the embattled developer posted a US$ 60 million loss, following a US$ 17 million profit in 2018.

Amanat Holdings, currently listed on the DFM and an investor in healthcare and education businesses, plans to move its headquarters to Abu Dhabi and list its shares on the Abu Dhabi Securities Exchange. The nature of its businesses has obviously been negatively impacted by Covid-19 and has resulted in the need to cut costs and restructure the business model. One of its first measures has seen top management take voluntary pay cuts and, with no redundancies currently necessary, this has allowed the senior team to remain together to look for growth opportunities and additional regional investments. Amanat, which posted a 40% jump in 2019 profit to US$ 11 million, already holds shares in Middlesex University Dubai, Abu Dhabi University Holding Company and Jeddah’s 300-bed hospital, International Medical Centre.

Although Q1 revenue was 33.9% higher at US$ 327 million, Damac announced a US$ 26 million loss for the quarter, (compared to an US$ 8 million profit last year). The two main drivers for the deficit were impairment provisions of US$ 35 million, against the value of development properties, and a US$ 14 million charge in relation to trade receivables. Its share value at the close of trading last Thursday was US$ 0.169, equating to a market value of US$ 1.0 billion. Cognisant of the fact that there is an apparent oversupply in the local market, the chairman, Hussain Sajwani, has reiterated that “in 2020, we will remain focused on delivering projects that are already in our development pipeline,” as Damac tries to bring the supply/demand curve to some sort of equilibrium. In Q1, the developer delivered 650 units in its Akoya master community.

Because of the Eid holiday, the bourse opened on Wednesday 27 May and, 45 points (2.4%) higher the previous week, after two days’ trading was 21 points to the good (2.4%), to close on 1,961 by 28 May. Emaar Properties, up US$ 0.01 the previous week, was US$ 0.02 higher atUS$ 0.68, whilst Arabtec, down US$ 0.02 the previous three weeks, was US$ 0.01 lower at US$ 0.16. Thursday 28 May saw the market trading at 337 million shares, worth US$ 118 million, (compared to 252 million shares, at a value of US$ 101 million, on 21 May).

By Thursday, 28 May, Brent, lower by US$ 0.08 the previous week, closed US$ 3.64 (11.6%) higher on US$ 35.08. Gold, down the previous week by US$ 16 (1.0%), nudged up US$ 7 (0.4%) on the week to close on Thursday 28 May, at US$ 1,735.

It seems that the Macron government will bailout Air France, with a US$ 7.7 billion finance package on condition it halves its carbon dioxide emissions by 2024. To meet this target, the carrier would have to “drastically” reduce domestic air traffic – a heavy price to pay since last year it was already losing US$ 220 million on its domestic network. In Q1, it posted a US$ 2.0 billion loss and, because of the lockdown restrictions, is currently operating only 5% of its usual schedule. By the end of next month, it hopes to have 15% of its scheduled flights operating.

Having closed its budget airline Germanwings last month, Lufthansa has negotiated a US$ 9.6 billion state rescue deal to save it from collapse, with the government becoming a 20% shareholder, which it proposes to sell within three years. Part of the package also includes a US$ 6.3 billion non-voting capital, which can be converted to an additional 5% equity stake, which would then allow the government to veto any hostile takeover bid. The deal, which has saved 10k jobs, still has to be ratified by the shareholders and the EC. The Merkel government has set up a US$ 120 billion fund to shore up, and “save” legacy companies, such as Lufthansa, that had been viable prior to the pandemic.

A decision by Germany’s highest court has paved the way for 60k similar cases to take similar action against Volkswagen, who seem to have already agreed to offering affected motorists a one-off payment.   It ruled that VW had to pay compensation, being partial reimbursement with depreciation taken into account, to a buyer of one of its diesel minivans, fitted with emissions-cheating software. It has already paid out a massive US$ 33 billion in fines, compensation and buyback schemes over the past five years and has already settled a US$ 910 million separate class action by 235k German car owners. It is now facing similar action in the UK where 90k are chasing the German car giant (including its other brands – Seat, Skoda and Audi) for damages. The company – and some of its senior employees – are paying the price for using illegal software, by fitting a “defeat device”, which alerted diesel engines when they were being tested.

There are reports that SoftBank’s Vision Fund could be retrenching almost 10% (500) of its workforce, as it comes to terms of horrific Q1 figures when, because of the declining value in start-ups, it racked up losses of US$ 18 billion. This came after a US$ 17.7 billion loss for the US$ 100 billion Vision Fund, attributable to the writing down of the value of investments, including WeWork and Uber. SoftBank founder Masayoshi Son estimates that of the eighty companies in its portfolio, led by ex-Deutsche Bank’s Rajeev Misra, 18.8% will probably go bankrupt. Son realises that it is difficult to find new investors when results are so bad and so has to invest internal money – he has plans to divest US$ 42 billion in assets, including a near 50% stake in dog-walking start-up Wag Labs, to finance stock buybacks and pay down debt.

April saw UK car manufacturing in dire straits in a month that only 197 premium and luxury sports vehicles were produced – 99.7% lower than a year earlier. Last year, the UK manufactured 1.3 million vehicles, of which 82% were exported, although exports did decline 14.7%. In March, manufacturing was 37.6% lower at 79k, with Q1 figures 13.8% lower at 319k, whilst exports hovered around the 79% level. Now the aim of the industry is to ramp up manufacturing, as quickly as possible, as it could have already lost 400k sales equating to US$ 15.0 billion in revenues and also valuable exports.

Chief Executive Andy Palmer has paid the ultimate price for being in charge of a company that had seen its share price nosedive 94% since its October 2018 listing. The Aston Martin boss had been in charge for the past six years and the carmaker was struggling even before the coronavirus crisis hit sales, with its share price trading at just US$ 0.42. In Q1, unit sales halved to just 578 units., with the losses seven time higher at US$ 143 million. In January, the 107-year old company raised emergency funding of US$ 500 million, of which 37% was attributable to Lawrence Stroll, part owner of Racing Point Formula 1; the deal will also see a rebranding of his F1 team to Aston Martin next year.

Another UK car maker in trouble is McLaren which plans to slash its 4k workforce by 30%, as sales have slumped and advertising revenue tanked, having been “severely affected” by the crisis. The supercar maker has been impacted by F1 racing being suspended and slowing car sales; its 800-strong workforce at its Formula 1 operation will see cuts of about 9% initially, but because of a recently introduced sport-wide budget cap will see more redundancies next year. All F1 teams – including Mercedes Ferrari and Red Bull – will have to adhere to the new rules that includes reducing head counts.

To the dismay of so many Australians, Wesfarmers, the owner of the much-loved Target brand, has either to close – or rebrand – 167 Target sites. Since Target is operating in the same sector as its more “successful” sister, Kmart, the owners have decided to rebrand 92 of the stores and close the remaining 75. Kmart was always considered the “higher-priced”, but more popular alternative, with the Australian public whilst moving away from successful collaborations with designers such as Stella McCartney. Where Kmart was successful, was with their embracing online trading and convincing the public that it had a preference for the Kmart brand. Now that consumer confidence is at an all-time low, and wages growth stalled, it is logical why Wesfarmers has decided to opt for Kmart, especially with increased competition from the likes of Uniqlo and H&M. There is no doubt that with overall retail spending falling by US$ 215 billion – with online trading currently growing at 10% – the retail pie will only accommodate a certain balance of consumer spend and this is going south so that physical stores will suffer and close.

A major Australian “cock up” has seen the number of people on JobKeeper reduced from 6.5 million to 3.0 million and that the cost to the government of running the scheme being cut from US$ 80 billion to US$ 43 billion. According to the ATO, the error was caused by some 1k businesses wrongly filling out their applications and, in true bureaucratic style, the problem has been deftly handballed away from their court. However, they did concede that the application form “could have been more straightforward”. It seems that many businesses filled out how much financial assistance they expected to receive rather than how many employees they though would be eligible.

Japan is set introduce a further US$ 1.1 trillion stimulus package, following a similar package rolled out in April, as it tries to cushion the severe impact Covid-19 has had on the country. US$ 333 billion of the total will be for direct spending, including increased medical funding, student support and subsidies for struggling companies.  The Abe government has now spent the equivalent of 40% of Japan’s GDP on fighting the pandemic and, to fund these packages, Japan will issue US$ 310 billion in government bonds. These developments come at a time when the world’s third largest economy is now in technical recession and heading for a major slump.

As widely expected, Argentina failed to meet Friday’s deadline and has defaulted on about US$ 500 million in bond payments. The government’s initial offer of restructuring some US$ 65 million in foreign debt was roundly rejected, whilst the Exchange Bondholder Group, a major group of eighteen investment institutional creditors has confirmed its commitment to counter proposal to provide “significant debt relief to Argentina and beyond doubt provides a sustainable debt structure for Argentina in respect of Exchange Bonds”. This is the country’s ninth sovereign default and an agreement of sorts is expected in days despite an “important distance” left to reach a deal between both parties.

To help their economy to weather the Covid-19 storm, Chinese authorities have announced US$ 430 billion worth of stimulus funding, as the economy contracted 6.8% in Q1. The money will be spent by local governments to help with the survival of private companies, to prevent job losses and to ensure the public’s basic needs are met.  More interesting is the fact that the Party failed to set a future growth target, which has been the norm for some time, citing it would be focussing all its efforts on fighting the pandemic. Although it was the first country to come out of the pandemic, having been the first to suffer, it has struggled to get the economy going. It was estimated that 30% of the country’s 442 million workers lost their jobs, at least temporarily during the Chinese lockdown, and that 25 million jobs may have gone for good.

There are concerns of China’s role in possibly not sharing all the relevant details of the initial Covid-19 breakout in Wuhan last December. Now the country has angered world powers again by passing a national security law to crack down on political freedoms in Hong Kong. Donald Trump will again be centre stage and there is no doubt that, just as last year when the US/Sino tariff war disrupted global trade, the global economy will suffer at such a critical time. Any ramp-up of tensions between the two superpowers will have a negative knock-on effect on the global economy at a time when it will be trying to recover from Covid-19.

For the first time since the onset of Covid-19, the US has posted a decline in jobless numbers – a sure indicator that people are starting to return to work. The number of ongoing benefit claims has declined to 22.1 million – a surprise to many who thought that this number would continue to rise. Weekly jobless claims, of 2.1 million were reported, as at 23 May, bringing the total from mid-March to 40.7 million. The beginning of June could see a US unemployment rate of 20%.

Dubbed Next Generation EU, the bloc has finally agreed to a major US$ 825 billion recovery plan, two thirds of which will be in grants and the balance in loans. With this boost, and the initial US$ 600 billion initial rescue package, along with the proposed 2021-2027 US$ 1.2 trillion budget, it hopes that the total of US$ 2.6 trillion is enough money to “throw” at the problem to “kick-start our economy and ensure Europe bounces forward”. Although the two major players, Germany and France, have agreed to raising money on the capital markets, all 27 member states have to agree to the proposal and there are still the so-called “Frugal Four” – Austria, the Netherlands, Denmark and Sweden – continuing to object to both taking on the debt for the poorer countries and cash handouts to relatively poorer countries, rather than low-interest loans. “Problem” countries include those with high government debt to GDP – Greece (177%), Italy (135%), Portugal (118%), Belgium (98%), France (98%), Spain (96%) and Cyprus (96%).  All this money has to be repaid and could take up to thirty years, with the EC considering ways of raising the money including a carbon tax, a digital tax and a tax on non-recycled plastics.

With many outlets still closed, UK retail sales plummeted last month by 18.1%, with clothing sales faring even worse by almost 50%. However, one glimmer of hope was that online shopping accounted for a record 30.7% of total sales, with all items, excluding clothing or household goods, posting record highs. As a direct result of the lockdown, the number of shoppers visiting UK High Streets, retail parks and shopping centres fell by 80%, compared to 41.3% a month earlier. Primark is a good illustration of the economic damage being wreaked on the sector and has posted monthly sales down from an average US$ 780 million to almost zero.

Latest figures indicate that 8.4 million UK workers are now covered by the government’s furlough scheme, (costing US$ 18 billion, so that those affected can receive 80% of their wages up to a maximum US$ 3k), whilst 2.3 million self-employed workers have made claims costing US$ 8.1 billion. These and other costs are expected to total US$ 150 billion, with the annual borrowing bill equating to 15.2% of the country’s GDP.

The UK government is racking up huge amounts of debt, as public borrowing surged to US$ 75 billion in April – a record monthly high, caused by heavy public spending, including the furlough scheme that has been extended to October, to ease the impact of the coronavirus crisis. It is now estimated that the deficit could near US$ 360 billion – this means that the UK government is forecast to spend more, as a result of Covid-19, than it will earn, as tax revenue tanks; for example, April VAT revenue was negative, as collections were less than refunds.  This new figure is five times more than was forecast at the time of the March budget – and could be even worse come the end of the fiscal year. As a result of the borrowing, total public sector debt, at the end of last month, rose to US$ 2,266 billion – US$ 142 billion higher than in April 2019 – and equating to about US$ 34k per person in the country. Even with low – and even negative – interest rates, the money has to be repaid. This rate of spending cannot go on ad infinitum and the time will come when the painful decision has to be made to turn the spending tap off. Then when the pandemic abates, both the state and business will be saddled with falling revenue and increasing debt; the amount required to refloat the sinking UK economy will be astronomic, bearing in mind that even before Covid-19, UK businesses were carrying an estimated US$ 125 billion in unsustainable debt. 

There is no doubt that history repeats itself – this time it seems that the UK government could imitate a model once undertaken by the Iron Lady, Margaret Thatcher, some forty years ago. Then her government supported various prominent troubled UK companies by investing state funds, often by way of offering convertible loans or taking an equity share, and then selling their share, more often than not, for a profit. A win win for both stakeholders – the company received much needed backing to carry on business and the government not having to pay out on benefits, whilst still continuing to receive tax receipts. There could be up to US$ 30 billion set aside for the government to assist otherwise stable UK companies, impacted by Covid-19, with a cash boost. Stellar names such as Rolls Royce, Jaguar Land Rover, Virgin Atlantic and British Aerospace could already be in the queue to take advantage of “Project Birch”. It will enable the Chancellor, Rishi Sunak, to handle bailouts on a case-by-case basis of viable companies, whose failure will “disproportionately harm the economy”.

Thomas Edison must be turning in his grave with news that the company he founded has sold its lighting business, (along with smart home goods), to Savant Systems, for an undisclosed amount. General Electric has been struggling with falling cash flows and sluggish demand. The company was established in 1892, even though Edison had created the first practical commercial incandescent lamp, thirteen years earlier. Lightbulbs had been the centre of its business but GE struggled to keep up with the times, particularly when it came to LED. Since then, GE has been transforming itself into a more focused industrial company primarily on making jet engines and power-generation equipment and lighting became an increasingly small part of its business. Now with the final demise of this part of Boston-based General Electric, it seems The Lights All Went Out In Massachusetts.