Riders On The Storm                                                                                        16 July 2020

According to reports this week, JLL estimate that 12k units were handed over in Q1, a long way short of the 83k that was forecast at the beginning of the year – and well before the onset of Covid-19. Market stabilisation was expected to be ushered in prior to – and because of – Expo 2020, (subsequently delayed for a year), with a feeling that the real estate market was well into the bottom of its cycle and finally ready to see the process start to nudge northwards. The pandemic, which will see the loss of thousands of businesses, and up to a possible 400k jobs, has resulted in the cycle getting deeper and that any recovery will now take a lot longer to gain traction, as prices continue declining. In other words, it will not be before next year until prices come off their bottom and there could be further falls before then.

A recent Bayut/Dubizzle report indicates that Dubai H1 property prices shed less than 4.0%, with some locations posting a period of stability, when compared to H2 2019. The market has been in a downward spiral for the best part of six years and any hope of a turn in fortunes in 2020 were dashed by the onset of Covid-19. Over the six-month period, the Dubai Land Department recorded 15.9k sales transactions, valued at US$ 8.9 billion. The survey noted that Dubai Marina, Downtown Dubai, Arabian Ranches and Palm Jumeirah were the more popular buying locations, with renters more interested in the likes of Jumeirah Village Circle, Dubai Marina, Mirdif and Jumeirah. The average prices per sq ft of established residences in Arabian Ranches, Palm Jumeirah and Dubai Marina were US$ 244 (up 1.6%), US$ 552 (flat) and US$ 339 (2.2% lower) respectively. For rentals, JVC remains the favoured location for apartments, as does Mirdif for villas. Despite initial estimates of a flood of new properties entering the market this year, only 5.6k were handed over in Q2, with a further 38k slated for H1; there is no chance of this happening.

Dubai’s Crown Prince and Chairman of Dubai Executive Council, Sheikh Hamdan Bin Mohammad bin Rashid Al Maktoum, approved a US$ 308 million stimulus package to further assist the ravaged-hit Dubai economy for the next three months. For the hospitality sector, measures introduced include a 50% refund on the 7% municipality fees charged on sales, for the next three months, with the ‘Tourism Dirham Fee’ halved until 31 December. Private schools will be exempted from commercial and educational licence renewal fees until the end of the year, whilst the government has taken steps to expedite payments in both the medical and construction sectors. When it comes to international trade, fines can be paid in instalments with some of them reduced by up to 80%. To date, the Dubai government has pumped in US$ 1.7 billion to try and get the economy back on track.

It seems likely that Boeing will be unable to start delivery to Dubai of the 115 777Xs next year as planned because of the impact of Covid-19, which closed down production, and the fact that there is a lengthy certification process involved; this has arisen following the shenanigans surrounding the March 2019 grounding of Boeing’s 737 Max, after two fatal crashes. Emirates is the main customer for the new jet and will have to consider options if its debut is delayed, one of which is to swap some of the model for Boeing’s 787 Dreamliners. One thing that Covid-19 has taught the aviation sector is that smaller planes are better matched to the “new” demand, and the 787 seems to fit that bill. The Dubai airline had already converted some of its initial 2013 order for the Dreamliner, after the original 777X 2020 delivery date was pushed back a year, following delays to the plane’s General Electric Co. turbines.

With Airbus terminating the A-380 program earlier than expected, with the last of the 252 planes coming of the production line in 2022, Emirates has had to rethink its stance on the super jumbo. The airline, not only the 777X leading customer but by far the biggest in the world for the A380, expects delivery of three planes this year, probably in November, and the final two next year; these new planes will have premium economy seats, as part of its configuration, whilst some of the existing fleet will also be retrofitted with “new” seating.  It aims to maintain all 115 of its A380 fleet and expects to have 70% of them operational by the end of the year. The airline, along with all major global carriers, has been ravaged by the pandemic and has had to take drastic action, including ways to streamline operations and increase efficiencies. One possibility could be combining the back-office operations with flydubai, whist maintaining two separate companies and identities.  (Interestingly, Emirates A380 returned to the skies yesterday for the first time since 25 March, with EK001 departing for London Heathrow).

It has been reported that the airline will probably end up having to cut staff numbers by 15% to 51k, as it slowly recovers from having to ground most of its fleet at the height of the Covid-19 crisis. A reported 700 of the airline’s 4.5k pilots were given redundancy notices last week, which means at least 1.2k have been told their jobs are going since the coronavirus crisis started. This comes after the airline was “heading for one of our best years ever”, before the onset of the pandemic.

NMC Healthcare has opened its 17^th CosmeSurge Hospital brand in Jumeirah. Specialising in cosmetic surgeries, the US$ 18 million facility hopes to tap into increased demand from local residents, as well medical tourism once that sector recovers from the impact of Covid-19. The hospital, with eight in-patient rooms, aims to provide the best treatment available.

In one month, from 15 June, troubled developer, Union Properties has seen its share value fall by 26.0% to trade on 15 July at US$ 0. O77, not helped by financial troubles, legal disputes and a supply imbalance in the Dubai property market. UPP is in the last throes of its debt restructuring, as its financials have continued to deteriorate; last year, it posted a 15.6% revenue decline to US$ 115 million, resulting in a US$ 61 million loss compared to a US$ 17 million profit a year earlier. Its balance sheet debt stands at US$ 490 million, with cash in hand of only US$ 71 million. The developer is hoping for a favourable outcome in its US$ 409 million legal arbitration case and this, allied with a successful debt restructuring program, could change the developer’s fortunes but this will not occur until late next year, if at all.

It is reported that a group of shareholders have called on the Dubai Financial Services Authority (DFSA) to carry out an investigation into Emirates REIT and its treatment of its investment properties’ valuations, as well as its fund’s operating expenses since April 2014. The group has called for an urgent “independent valuation”, requesting that, to avoid any bias, there should be no interference from the fund’s manager, Equitativa.

The bourse opened on Sunday 12 July and, 31 points (1.4%) lower the previous fortnight, was 29 points off (1.4%), to close on 2,053 by 16 July. Emaar Properties, US$ 0.02 higher the previous week, closed US$ 0.03 lower on US$ 0.72, whilst Arabtec, up US$ 0.02 the previous week, continued its recent good run and gained US$ 0.03 to US$ 0.21. Thursday 16 July saw the market trading at 193 million shares, worth US$ 45 million, (compared to 290 million shares, at a value of US$50 million, on 09 July).  

By Thursday, 16 July, Brent, US$ 3.14 (7.3%) lower the previous week closed US$ 1.13 (2.8%) higher to US$ 40.75. Gold, having gained US$ 91 (4.4%), the previous five weeks, was US$ 6 (0.9%) lower, closing on Thursday 16 July, at US$ 1,800. 

Although oil demand will remain below pre-pandemic levels for the rest of the year, Opec expects a growth of seven million bpd, with demand up to 97.7 million bpd, by next year. The cartel expects 2020 demand to decline by 8.9 million bpd, slightly up on the previous forecast because of a marginal increase expected from the OECD region offsetting downward adjustments in other countries. This figure is 0.8 million bpd less than the 9.7 million bpd production cuts, as Opec tries to reduce oil inventories and support the energy industry, rattled by a record plunge in demand and prices. At yesterday’s joint ministerial monitoring committee, Opec+, an alliance of oil producers led by Saudi Arabia and Russia,  decided to ease previous output restrictions, starting next month, from the existing 9.7 million bpd to 7.7 million bpd, as the demand for crude returns, amid the lifting of movement restrictions in many countries.

To finalise a deal made last year, BP has paid US$ 1.0 billion to India’s Reliance BP Mobility Limited (RBML). This gives the UK oil giant a 49% share in a new fuels and mobility JV with India’s largest private sector company, Mukesh Ambani’s Reliance Industries, that will hold the majority 51% stake. The new company hopes to ramp up its current network of fuel retail sites from 1.4k to 5.5k over the next five years, that will see payroll numbers quadrupling to 80k over that period; it also expects to expand its presence in airports by 50% to forty-five.

Over the next twenty years, it is forecast that the country will see a six-fold increase in passenger cars, to become the fastest-growing fuels market in the world.

Despite the impact of Covid-19 and the downturn in energy prices, Moody’s indicate that GCC banks have adequate capital, underpinning their solvency, helped by their combined 2019 aggregate net income of US$ 34.7 billion. It forecasts that 2020 profits will decline because “the economies of all six GCC countries will contract, sapping the banks’ two main income streams – interest on loans, and fees and commissions – while provisioning charges for loan losses will rise sharply.” The local economies will feel the negative creditworthiness impact of both corporate and domestic borrowers which will overspill into a significant bounce in non- performing loans, requiring increased provisioning charges, which will come in at a much higher level than the 2019 Moody’s rated banks figure of US$ 11.7 billion. Banks’ profits could be at least 20% lower by year end.

On the aviation front, Virgin Atlantic has announced a US$ 1.2 billion private bailout rescue package, after the Johnson government had refused any direct assistance. The airline resolved an issue that had seen US$ 250 million being held back by credit card processors. A US hedge fund and Richard Branson both came up with fresh lending of US$ 250 million, with relief on some US$ 500 million owed to Delta (delaying marketing fees and other dues) and payment concessions made by some jet-leasing firms.

South African Airlines’ creditors and the unions have agreed to a US$ 1.6 billion rescue plan for the country’s flag carrier that will see the workforce depleted by almost 80% to just 1k in the future; unions only agreed when the severances packages were improved. The only remaining problem is that the over-stretched National Treasury will have to find US$ 600 million more than previously allocated to SAA; indeed, the finance minister, Tito Mboweni, has already voiced his reluctance to put any more money into a business that has not made a profit over the past decade.

To nobody’s surprise, the UK government has banned companies from buying any new 5G equipment from Huawei after 31 December 2020 and they also have to ensure that they are not carrying any of the Chinese firm’s 5G kit after 2027. It is thought that this move will delay the UK 5G roll-out by up to a year and could cost US$ 2.5 billion. The ban does not apply to Huawei’s other equipment and the firm will be able to sell its smartphones to consumers, and dictate how they will run, and will not have to remove any of its 2G, 3G and 4G equipment. The UK has followed in the steps of the US, citing that old chestnut, “national security issues” as the reason for the decision.

In what is the largest corporate acquisition this year, Analog Devices has agreed to pay US$ 20.0 billion for Maxim Integrated Products in an all-stock deal that has created a company, valued at US$ 68.0 billion. Maxim shareholders, whose market value was at US$ 17.0 billion last Friday, will hold a 31.2% stake. Both companies make analogue chips, with Maxim, specialising in chips for car, the health service and mobile phones, posting revenue of US$ 2.3 billion last year, whilst half of Analog’s US$ 6.0 billion was derived from industrial clients. This follows two high profile mergers over the past fortnight – Berkshire Hathaway’s US$ 9.3 billion purchase of Dominion Energy’s natural gas transmission business and Uber’s US$ 2.7 billion purchase of Postmates. This is a positive indicator that the M&A sector is shaking off a listless start to the year and the impact of Covid-19.

One company that has Covid-19 to thank for a welcome boost to their revenue is WeWork, now aiming to have a positive cash flow in 2021, a year earlier than expected because of strong demand for office space since the onset of the pandemic. The New York-based company has also taken strong cost cutting measures including retrenching 8k of its workforce, selling off non-core assets, renegotiating office rents and shedding other costs under its  Bolivian-born Executive Chairman, Raul Marcelo Claure; he is also  chief executive officer of SoftBank Group International and chief operating officer of SoftBank Group Corporation. He was appointed last October to oversee the company after its disastrous IPO a month earlier that forced the shareholders to push out co-founder Adam Neumann; at the time, WeWork was privately valued at US$ 47 billion – today it has a more realistic US$ 2.7 billion market cap.

The Softbank CEO admitted that the group’s biggest error was its US$ 10.0 billion investment in the office-sharing group, WeWork. However, Softbank has had a phenomenal four months that has seen shares of the Japanese tech conglomerate recover by 143% to a twenty-year high. This comes after its founder, Masayoshi Son, suggested he had been misunderstood like Jesus Christ. Since mid-March, some high-profile investments in its US$ 100 billion Vision Fund, including Uber and Slack, have doubled. Subsequently, the tech company, which promised that it would raise US$ 41.0 billion to spend on buybacks and reducing debt, has managed to merge its stake in Sprint with T-Mobile, selling part of its holding for US$ 23.2 billion, and sold down some of its stake in Alibaba; this has seen it reach 90% of its US$ 41 billion target.

One share that has gone through the roof is the one year old buy now, pay later company, Sezzle. On 23 March, the share was trading on the ASX at US$ 0.24. Earlier this week, the US company was trading at a mouth-watering US$ 5.90 – an increase in excess of 2,500% in less than four months.  Such tech stocks are performing well, not only in Australia, where the ASX tech index is 12% higher over the past five months, but also in the rest of the world including the US, where the Nasdaq has hit record levels, and is almost 15% higher YTD. Even thoughSezzle posted a 58% increase in Q2 merchant sales to US$ 272 million (and 348.6% higher over twelve months), its user base up two and a half fold, along with a 243.2% hike in its payment platform, the massive jump in its share price cannot be justified and has all the hallmarks of a tech bubble in the making. Once everyone jumps on to the bandwagon, it is past the time to leave the party. When the bubble bursts, it will not be a pretty sight.

Three major US banks – Wells Fargo, JP Morgan Chase and Citibank – have already booked US$ 28.0 billion for current and future losses in Q2. JP Morgan, setting aside US$ 10.5 billion for potential credit losses, comes on top of the US$ 8.3 billion impairment provision already made in Q1.  All three posted much lower quarterly returns. JP Morgan saw profit dive by over 50% to US$ 4.7 billion, Citigroup, 73% lower at US$ 1.3 billion and Wells Fargo a loss of US$ 2.4 billion (compared to a quarterly profit of US$ 6.5 billion last year) – and its first deficit since the 2008 GFC. This is a sure indicator that companies and households are struggling to pay their debts and the banks’ raised impairment losses point to the fact that Covid-19 has – and will continue to – put the brakes on the US economy.

Yet again Westpac appears to be heading for further trouble as a legal firm is taking a class action against the bank on behalf of thousands of Australians who took out car loans that allowed dealers and brokers to charge customers an interest rate above the base rate set by the bank and take a cut of the difference to receive a bigger commission. Known as “flex commission”, (and outlawed in November 2018), Westpac is not the only financial institution to set exorbitant interest fees, with cases of customers being charged between 6.5% and 15.5% interest over and above the base rate. Described as “rip-off loans”, banks have been criticised for lack of transparency and for breaching their fiduciary duties to act fairly and honestly when providing loans. As usual, it was the consumer who paid the cost for not knowing of these underhand arrangements that allowed the dealer to secure the highest rate possible. On being asked whether his bank’s actions could have encouraged dealers to make inappropriate loans, so as to secure a commission, the then-chief executive, Brian Hartzer, haughtily replied, “I couldn’t say. I’m not a car dealer.”

The EU had a big loss this week as the Luxembourg-based General Court confirmed that Apple does not have to pay US$ 14.4 billion that the EU Commission had claimed  the tech company owed, having had an illegal sweetheart tax deal with Irish authorities. The court said that “the Commission did not succeed in showing to the requisite legal standard that there was an advantage.”  The initial decision against Apple came in 2016 when it was ordered to repay the US$ 14.4 billion in Irish back taxes Apple posted, probably a little tongue in cheek that “this case was not about how much tax we pay, but where we are required to pay it. We’re proud to be the largest taxpayer in the world as we know the important role tax payments play in society.”

The US has introduced a 25% tariff on French goods, in response to the Macron government’s insistence on taxing the giant tech companies such as Amazon, Facebook and Google. This will be delayed for six months because the French have yet to collect its digital tax. The tariff will be levied on items such as handbags and soap, but the likes of French cheese and wine are currently not on the list. The French administration has confirmed that “if there is no international solution by the end of 2020, we will, as we have always said, apply our national tax”. The Trump government pulled out of OECD discussions last month after it failed to reach an agreement on developing a global levy.

Google is set to invest US$ 10 billion through the India Digitisation Fund over the next several years to build products and services for India, help businesses go digital and use technology “for social good”. The country is – and will continue to be – a lucrative market for tech companies like Google, with 500 million of its almost 1.4 billion population active internet users, as well as 245 million YouTubers. The Indian-born CEO of Alphabet, (of which Google is a subsidiary), Sundar Pichai, has had talks with Prime Minister Modi about overhauling the country’s digital infrastructure and “leveraging the power of technology to transform the lives of India’s farmers, youngsters and entrepreneurs”. He also said the fund would focus on four areas so as to:

enable “affordable access and information for every Indian in their own language” (it is estimated that English now accounts for only 34% in the country’s overall content consumption)     

“build new products and services that are deeply relevant to India’s unique needs”        

empower local businesses who want to go digital

“leverage technology and AI for social good”

In the UK, the Financial Reporting Council has admonished the country’s biggest auditors for an “unacceptable” decline in the quality of their work, with a third of their audits falling below the expected standard.  The Big Four firms – Deloitte, EY, KPMG and PwC – along with BDO and Grant Thornton have been told that a higher number of audits required significant improvements, indicating that the agency was “concerned that firms are still not consistently achieving the necessary level of audit quality.” Three of these firms – PwC, KPMG and Grant Thornton – were hauled over the coals, with 45% of the latter’s audits surveyed “requiring improvements”, as did 29% for EY and 24% for KPMG. The same three had come in for sharp criticism for their involvement in high-profile corporate failures at Thomas Cook, Carillion and Patisserie Valerie.

For the year 2019-2020, there was a 6.4% increase in remittances into Pakistan, totalling US$ 23.1 billion, and this despite the negative impact of Covid-19. If June statistics are anything to go by, this annual figure is set to grow by even more, as the State Bank of Pakistan announced that monthly remittances were 50.7% higher, year on year, at US$ 2.5 billion, of which 17.5% of the total (US$ 432 million) emanated from the UAE – 33.5% higher than the previous month. Such remittances provide a cushion for the economy which contracted 0.4% last financial year ending 30 June.

Driven by an extended lockdown, that ravaged the economy with businesses closing down and retail spending tanking, Singapore has plummeted into recession. Q2 saw the city state contracting by a massive record 41.2%, quarter on quarter, (and 12.2% year on year), in what will be the worst recession since independence from Malaysia in 1965. These disastrous figures could indicate that Singapore might be worse hit than its neighbouring countries, as it relies heavily on global trade and manufacturing exports. Initial figures from Japan and China point to a 20% decline and a slight growth respectively. It seems that the US$ 67 billion, equivalent to 20% of its GDP, the Singaporean government spent on stimulus measures may not have been large enough.

China continues to pump in funds to boost its economy, with H1 bank lending reaching a record US$ 1.73 trillion. Governor Yi Gang has confirmed that the central bank will keep the financial system liquidity in H2, as the economy improves, but the QE programming cannot go on forever and some analysts are discussing when the tap will be turned off. The bank has already extended loans to companies, impacted by Covid-19, and cut lending rates and banks’ reserve requirements but has yet to follow other countries’ measures such as slashing rates to almost zero and introducing massive bond buying sprees. Whether this will take place in China remains to be seen. However, latest figures see China escaping a technical recession as its economy grew by 3.2% in Q2 – a figure much higher than many analysts had expected and having all the hallmarks of a V-shaped recovery for the world’s second biggest economy.

IMF’s managing director Kristalina Georgieva noted that there were signs of recovery but warned the global economy is ‘not out of woods yet’ and will face ongoing problems, including the possibility of a second wave. That being the case, she is recommending that governments maintain their support programmes, even as restrictions are being eased. She is also concerned about the future of some G20 SMEs, suggesting that for this sector, the number of bankruptcies could triple this year, rising to 12% of the total compared to 4% last year, with Italy the worst hit. Services sectors will suffer the most, with liquidations rates above 20%.

The global agency estimated that the world economy will shrink 4.9% this year and that it will lose more than US$ 12 trillion over the next two years. Some other indicators are causing concern that could scar certain countries’ economies for some time in the future, as 170 countries will be left worse off by Covid-19 and end the year with a lower per capita income. Two problem areas are debt and employment. The global debt levels now stand at over 100% of GDP and Economics 101  indicates that the only way that governments can manage such huge balances is via higher taxes or cutting public services; maintaining the level at these historical highs – even more attractive with interest rates so low – does not seem viable to Treasury mandarins the world over. It is time that economists looked closer at the long-standing and traditional viewpoint that public deficits are inherently bad and should be avoided at all costs. Covid-19 may force a welcome and belated rethinking of this theory. Even though restrictions are being lifted and more people are returning to work, unemployment rates continue to be worryingly high and are unlikely to return to pre-crisis levels in the short term. It has been said that the US lost more jobs this March and April than it had created since the end of the 2008 GFC.

The latest IMF forecast sees 2020 4.7% falls in the economies of the ME and Central Asia, driven by the double whammy of Covid-19 and lower oil prices – 2.0% higher than in April; next year, a 5.4% recovery is on the cards, despite downside risks still remaining. Global uncertainty is still present, more so in the ME, because of both the pandemic impact on businesses, now and in the short-term, is still unknown as is the possible volatility risks in the oil market on global trade. There has been more than US$ 11 trillion poured into global economies to try to limit the economic fallout from Covid-19 that has, to date, infected 12.8 million and killed 568k.

It is patently obvious that the UK has to plan for a post-pandemic economy, with a priority on quickly repaying the expected US$ 465 billon it will borrow this year. This will lead to higher taxes and a massive cut in public spending for an economy that is set to slump by 12.4% this year and see its public debt equating to 104.1% of GDP. Promises to pump in extra funds into the embattled NHS, as well as the prospects of having to pay extra costs of an ageing population and an increasing number of unemployed, (still at an estimated 12.0% by the end of the year and 10.1% in 2021), will push up public spending in certain sectors that will have to be met by reducing spending in others to meet that particular deficit and more to cut back the massive public debt. The situation will not be helped by the fact that business indebtedness will rise to record levels, which will see less tax revenue being generated, and other companies falling by the wayside. It has been estimated that to return UK’s debt level to an “acceptable” 75% of GDP would require an extra US$ 75 billion (via tax rises or public spending cuts) every year until 2070! However, as indicated above, the government would do well to look at this debt problem from a different angle, as it tries to solve the conundrum of managing and controlling falling tax revenue and rising public costs.

In the four months to 30 June, UK payroll numbers fell by 649k, although the overall jobless rate was unchanged. The headline unemployment remains steady at 3.9%, to the surprise of many who thought it would surge; however, the fact that 11 million are still on the government furlough scheme skews the employment statistics. A look at the number of hours worked gives a clearer picture – weekly hours worked since the onset of Covid-19 have tanked by 16.7% to 877.1 million hours, equating to its lowest level since 1997. To make matters worse, the average real pay is 1.3% lower than a year earlier. The simple truth is that there are not many jobs around for anyone – and a storm is coming with the worst-case scenario being an October unemployment level of over four million Riders On The Storm.