Go Your Own Way                                                                                         23 July 2020

Latest figures from Moody’s Investors Service just confirm a 30% fall in Dubai property prices since mid-2014 and the sector is currently still in bear territory in an economic environment rattled by Covid-19 and sluggish oil prices. Until the supply/demand returns to some form of equilibrium, which can only arise if supply falls and demand increases, then slower home sales and lower rentals will continue. The agency does not see an improvement over the next twelve-eighteen months but that seems fairly pessimistic, especially if Dubai can ramp up its tourism and retail sectors, whilst introducing measures to boost consumer confidence battered by the current crisis. Moody’s expects Dubai homebuilders’ gross margins will continue to decline, as sales prices head south in a weakening market.

Over the past four months, most of which time the emirate was in lockdown, Nakheel managed tosell almost 250 properties, valued at US$ 163 million, 205 of which were for ready-to-occupy villas. The most popular location was Nad Al Sheba, where the developer sold out phases one and two last month and just released phase three. Al Furjan was also another sought-after location, with thirty-five ready homes sold since March.

The DIFC is proceeding well to achieve its 2024 target of tripling its size, as H1 figures indicate a 25% jump in the number of firms operating rising by 310 to 2.6k, of which 820 are financial firms; over the past six months, 87 Fintech firms, including Ripple and Kofax ME, joined the free zone – a 74% increase. New arrivals included the likes of Decimal Factor Funding Souq, Gazprombank and Tata Asset Management. It was estimated that the total size of the wealth and asset management industry expanded to US$ 422 billion, with other activities rising to US$ 276 billion.  

The ravaging impact of Covid-19 has had on the aviation sector can be seen from just two statistics from Dubai International. Before the pandemic, the airport dealt with 1.1k flights every day that fell to just seventeen a day as soon as lockdown was introduced in mid-March. In the monthof May the total number of passengerswas 44k – equivalent to what the airport was used to handling in four hours of a normal day. Now Emirates is slowly trying to return to some form of normalcy and has introduced a limited network which will see the carrier flying to fifty-eight cities – almost one third of the total 157 it was operating pre-pandemic.

Probably it is a good time for the Dubai Chamber of Commerce and Industry to look into the problem of late payments to subcontractors and suppliers, and a way to solve this long-standing problem which has a negative impact on the sector and has been a drag on Dubai’s economy. One of its main aims is to create “tools and processes” so that the settlement of outstanding bills can be speeded up. A recent Chamber study noted that 72% of the total value of outstanding business-to-business invoices were overdue, taking an average 94 days to settle, compared to 52% across the rest of Asia – some way off the thirty-day target pledged by the Dubai government.

After a couple of weather delays, the first Arab mission to Mars launched on Monday, making the UAE the first Arab country to send a probe to the red planet. The Al-Amal (‘Hope” in English) probe joins similar Chinese and US expeditions, all taking advantage of the unusual closeness of the two planets – Earth and Mars – being only 55 million km apart. If all goes to plan, Hope will start orbiting the planet next February and will spend the next Martian year (687 earth days) orbiting the planet, with the aim of studying its weather dynamics.

It seems that the Dubai could be one of the first out of recession, as economic activity improves on the back of monetary and fiscal support, along with restrictions being increasingly eased due to a reduction in the number of Covid-19 infections. Countries, such as the UK and Australia, will not feel the real pinch until October, when their government furlough schemes, which have helped “shelter” their economies during the pandemic, are lifted. Dubai took the hard decision not to follow suit but did introduce major economic stimulus measures and bank support initiatives, (such as zero interest funding to banks to boost lending growth), to underpin the market and boost investor confidence. Undoubtedly, the emirate has not escaped the negative economic impact of Covid-19 and there have been inevitable retrenchments and business closures.  Now it has to get the services sectors up and running as quickly as possible and, with a government, known for quick and decisive decision-making, this will be done. On top of that, if energy prices head north, the country’s economy will receive a fillip, with oil around the US$ 60 level.

Emirates became the first global airline to allow customers to claim US$ 642k in medical expenses, plus IUS$ 428 per day for fourteen days, if they were to be diagnosed with Covid-19 during their travel while away from home, regardless of class of travel or destination. This will be effective until 31 October, with the cover remaining valid for 31 days. Emirates’ chairman, Sheikh Ahmed bin Saeed Al Maktoum, hopes this move will boost confidence for international travel with passengers “seeking flexibility and assurances should something unforeseen happen during their travel.” This innovative move will surely boost the number of tourists holidaying in the emirate.

According to the online learning platform Coursera, the UAE is a global leader in business talent and is ranked fifth worldwide in business skills like management, marketing and sales. In its 2020 Global Skills Index, the country comes to 50^th in data science which emphasises mathematics and statistics and underpins automation.

The recently introduced Emirates Loto has been temporarily suspended so that a planned system upgrade can be implemented. The weekly fatwa-approved lottery draw, with potential cash prizes of up to US$ 13 million, is expected to return in Q4. The last draw, at the beginning of the month, saw two punters, selecting five of the six drawn numbers, each winning US$ 136k.

Arabtec, the country’s largest-listed contracting company, with a workforce of more than 45k, announced that its subsidiary, Target Engineering Construction Company, had been awarded a US$ 53 million contract for the replacement of storage tanks at Saudi Aramco’s Ras Tanura refinery in Saudi Arabia.

Etisalat posted a 3.0% hike in H1 profit (after royalty payment) to US$ 1.25 billion, on revenue of US$ 7.0 billion; consolidated EBITDA (earnings before interest, tax, depreciation and amortisation) came in with a 52% margin, totalling US$ 3.6 billion. The group has a subscriber base of 146 million, of which ten million access free browsing to over eight hundred websites related to education, health and safety.

There were disappointing – but expected – results from some of Dubai’s financial institutions this week. Because of the Covid-19 impact on the liquidity and profitability of their personal and business clients, as well as historic low interest rates, all banks have had to review their potential bad debts that will inevitably head north resulting in a jump in impairments -and much lower margins.

Emirates NBD reported a 45% slump in H1 profit to US$ 1.1 billion, distorted by the fact that last year’s comparative figures included a non-repeated gain on disposal of its stake in Network International; if this were excluded, the profit decline would have been 24.0%; Q2 profit was 57.8% lower at US$ 545 million. It did see a massive increase in its impairment provisions from US$ 335 million to US$ 1.14 billion.  Dubai’s largest bank saw its total income 33.0% higher at US$ 3.4 billion, driven mainly by higher fee income from the inclusion of its Turkish unit, DenizBank and its net interest margin rising to 2.84%. By 30 June, the bank’s total assets were 2.0% higher, at US$ 189.1 billion, and is loans up 1.0% to US$ 125.6 billion, but customer deposits were 2.0% down at US$ 125.6 billion.

Meanwhile, its sister bank, Emirates Islamic, posted an H1 profit of just US$ 3 million (H1 2019 – US$ 183 million), as its total income declined 15% to US$ 300 million. Its total assets dropped 1.0% to US$ 17.5 billion whilst its balance of customer accounts remained flat at US$ 12.3 billion, although, with a headline financing to deposit ratio of 90%, it remains in a healthy liquidity position.

Mashreq posted a 56.0% slump in H1 profit to US$ 146 million, with impairments more than doubling to US$ 266 million, while total operating income slid 8.0% to US$ 763 million. The bank, controlled by the Al Ghurair family, reported that there were jumps of 8.3% in customer deposits to US$ 26.9 billion, and 8.7% in total assets to US$ 47.2 billion; loans and advances remained flat at US$ 20.8 billion. Q2 profit slumped 86.0% to US$ 23 million, on a 13.0% income decline, to US$ 354 million, as impairment allowances rose 158% to US$ 155 million.

Dubai Islamic Bank reported a 23.0% fall in H1 net profit to US$ 572 million, on total income of US$ 1.9 billion. UAE’s largest Sharia-compliant lender posted a 192% jump in impairment losses to US$ 572 million, as operating expenses rose 22.0% to US$ 401 million. Over the six-month period, the bank’s net financing and sukuk investments were 29.0% higher at US$ 64.6 billion and customer deposits 26.0% higher to US$ 56.3 billion. Earlier in the year, DIB acquired rival Noor Bank to create one of the largest global Islamic banks, with more than US$ 75 billion in assets. Last month, the bank closed a US$ 1.0 billion five-year Sukuk with a profit rate of 2.95% which was 4.5 times oversubscribed.

Following recent problems with some stakeholders requesting the regulator to investigate valuation calculations by Emirates Reit and its fund manager, Equitiva, the board is discussing whether to delist from Nasdaq Dubai. Some feel that operating as a private Reit could be in the “best interests” of the fund, with “advantages of remaining publicly listed heavily outweighed by the disadvantages.” The “problems” have seen its share price on Sunday trading at US$ 0.15, whereas its net asset share value was US$ 1.41, “exacerbated by a cyclical downturn in the UAE real estate sector and a challenging operating environment.”

Dubai-listed Amanat Holdings has signed an SPA (sale and purchase agreement) with Study World Education Holding Group to divest of l its Middlesex University Dubai campus; no financial deals have been released to date but there would be an update if and when there were any material developments. The six-year old Dubai-listed company, with interests in both education and healthcare, acquired the Dubai campus, with 3.5k students, for US$ 100 million in 2018, from the liquidators of private equity firm Abraaj Group. Study World Education, founded by Indian businesswoman Vidhya Vino, operates schools in Dubai, India, Sri Lanka and Malta.

The bourse opened on Sunday 19 July and, 60 points (1.4%) lower the previous three weeks remined flat on 2,053 by 23 July. Emaar Properties, US$ 0.03 lower the previous week, closed down US$ 0.01 on US$ 0.71, whilst Arabtec, up US$ 0.05 the previous fortnight, continued its recent good run and gained US$ 0.04 to US$ 0.25. Thursday 23 July saw the market trading at 127 million shares, worth US$ 41 million, (compared to 193 million shares, at a value of US$ 45 million, on 16 July). 

By Thursday, 23 July, Brent, US$ 1.13 (2.8%) higher the previous week closed US$ 2.56 (6.3%) higher at US$ 43.31. Gold, having shed US$ 6 (0.9%) the previous week, had its best week for some time climbing US$ 98 (5.4%), by Thursday 23 July, to US$ 1,898.  The safe-haven commodity is nearing the US$ 1.9k level for the first time since 2011, mainly caused by the deterioration in US-Sino relations which has added a further dimension to fears of a global economic recovery, following the negative impact of the coronavirus pandemic.

In a US$ 5 billion share sale announced this week, Chevron has acquired Noble Energy in the energy industry’s first major deal since the onset of Covid-19 and the largest since Occidental Petroleum acquired Anadarko Petroleum in 2019. This will see Chevron’s proven reserves jump 18% and enhance its presence in the heartland of the US shale boom, (which is currently in a major downturn), in both the Denver-Julesburg Basin of Colorado and the Permian Basin.

Despite the Covid-19 impact, Rio Tinto posted a Q2 1.5% hike in iron ore shipments to 86.7 million tons, driven by Chinese efforts to ramp up infrastructure and construction spending to boost its flagging economy. Iron ore is an integral part of the world’s biggest miner and iron ore accounts for more than 80% of Rio’s underlying earnings. The miner reported a 3% decline in Q2 production of mined copper.

It is reported that, although the Tata Group stated that no decisions had been made,  two blast furnaces in Port Talbot could be closed, (to be replaced by electric arc furnaces), with the loss of “thousands and thousands” of jobs. The unions are concerned that they have not been involved in any discussions with Tata management, but the company has been in talks with the UK government. Steel production is the mainstay of the local economy, accounting for about 50% of all jobs in the Welsh town and it is easy to see the devastating effect that any closures would have on the community. It is no secret that the steel industry was struggling even before the onset of Covid-19 and since then customer demand has plummeted.

Because of the impact that Covid-19 has had on the aviation sector, BA has decided to retire all its remaining thirty-one 747s, with immediate effect. The airline, which is the largest operator of the plane known as ‘queen of the skies’, has been badly hit by a drastic downturn in travel and the new environment is pointing to fewer passengers and fewer planes. Furthermore, the 747 was far less efficient than the latest twin-engine models and more expensive to operate than the likes of the Airbus A350 and the 787 Dreamliner. IAG, the owner of BA, had originally planned to run the jumbo until 2024 but Covid-19 has brought the date forward. According to Moody’s, airline passenger demand will not recover to pre-coronavirus pandemic levels until the end of 2023 – and that is dependent on the availability of a vaccine.

In the UK, Azzurri Group has announced that it will close 25% of its 300 Zizzi and Ask Italian restaurants that could result in 1.2k retrenchments but keep 5k in work, driven by the impact of Covid-19. The group, which also owns Coco Di Mama, has been sold out of administration to Tower Brook Capital Partners. Only last month, The Restaurant Group, which owns Frankie and Benny’s, reported the closure of 125 location and the loss of up to 3k jobs.

Dyson confirmed nine hundred redundancies of which two thirds will be in the UK, as the coronavirus impact speeds up the company’s restructuring plans; it has a global work force of 14k, (in eighty countries), with 4k in the UK. Because consumer shopping habit are turning to online, most of the retrenchments will be in the retail and customer service roles. Most of Dyson products are designed in its two UK technology campuses but manufacturing takes place in Asia. Last year, the tech company pulled out of making electric cars because it was not “commercially viable”, although it had developed a “fantastic electric car”.

Covid-19 has helped boost buy now, pay later service Klarna which has seen its revenue booming, with the UK company reporting increases of 105% in running shoes, 60% in beauty product sales and “significant uplift” in purchases of bicycles and cycling accessories. However, the company has had to tighten its buying rules to try and maintain potential bad debts to a minimum (currently less than 1%) because of the financial uncertainty arising from the lockdown. In recent years, the number of such on-line companies, including ClearPay and Laybuy, has grown and are now being used by over eight million customers. The industry grew an estimated 39% last year and is expected to double in size by 2023.

In the UK, clothing companies, including Boohoo and Quiz, have been accused of using unethical suppliers in Leicester, where there are fears that factory workers have been underpaid, exploited and unprotected from Covid-19. The UK minimum wage is US$ 11.15, whilst there are reports that Quiz has suspended a supplier after it was found paying just US$ 3.84 an hour to make its clothes. It is estimated that up to 20k in Leicester alone have been “enslaved”, with employers using forced labour, debt bondage and mistreatment as normal behaviour. So many would have known what has been going on for years, but it seems, just like the “child grooming” scandals, they just turned a blind eye and let this scandal continue. The National Crime Agency has also confirmed it is investigating Leicester’s textile industry over allegations of exploitation.

Latest data shows that the UK retail sector returned to almost pre-lockdown levels in June with a 13.9% rise, month on month, following record falls in April and a partial recovery in May. However, there has been a marked change in customer shopping habits, with food and online sales up, while clothing was still “struggling”. In comparison with February, the volume of food sales was 5.3% higher, while non-store retailing grew by 53.6%; on-line sales continue to go from strength to strength, now accounting for almost 32% of the total retail business. However, non-food stores, including department stores and clothes shops were still 15% lower than in February, as reports indicate that shoppers are in for more staples and fewer impulse purchases; the knock-on effect on the High Street is that sales are down by about a third.

However, with retail only accounting for about 20% of the economy, the latest “flash” PMI rose to 57.1 in July, up  from June’s 47.7 – the first time since February the level has been above the threshold level of 50, which delineates between expansion and contraction. On the surface, it seems that the economy has recovered well but the scars will remain for some time and a total recovery will take a lot longer. Manufacturing and construction are slowly returning to some sort of normalcy but when they can reach pre-Covid levels remains to be seen and a clearer picture will emerge only after the government furlough schemes are closed down in October. Another problematic factor is “social spending” and whether services spending in restaurants, bars and hotels will ever return to their previous levels especially with social distancing still in place. Even in the unlikely event of restrictions being lifted, an expected doubling in the unemployment rate will surely have a negative effect, as discretionary spending will be reduced.

Having jumped more than 60% YTD, Netflix shares took a tumble, plunging almost 15% last Friday, on the back of disappointing Q3 subscriber forecasts of 2.5 million, with the market expecting double that number; its market value stood at US$ 232 billion after posting an increase in Q2 revenue to US$ 6.2 billion. There is no doubt that all is not well at the world’s largest paid streaming service, as H1 saw 10.1 million new subscribers bringing the total to 193 million, driven by the Covid-19 lockdowns which saw so many being forced to stay at home – and signing up. To be fair to the company, it did warn as early as April that this rapid growth could not continue but investors thought otherwise.

Goldman Sachs has finally settled with the Malaysian government over its role in that country’s 1MDB corruption scheme. It has agreed to a US$ 3.9 billion settlement after it had been accused of misleading investors when it helped raise US$ 6.5 billion for the government fund, with prosecutors claiming that billions of dollars were ultimately stolen – including by some of the bankers involved – to buy art, property, a private jet and super-yacht as well as to help finance the Wolf of Wall Street film. There is no doubt that the bank’s reputation has been sullied by the scandal, with twelve of its executives charged in Malaysia last year. The bank still faces possible charges in the US related to the deal, which prosecutors estimate earned the firm abouEU Stimulus, t US$ 600 million., with a penalty that could wipe out its Q2 profit.

It is estimated that short sellers have lost US$ 1.5 billion betting against Moderna, as it has climbed 370% to a market cap of US$ 36 billion. The high-flying vaccine developer biotech has reportedly developed a Covid-19 vaccine, with the company set to shortly start a final-stage study. By last Friday, the biotech, having surged 6.9% to a record level two days earlier, saw a 13% boost to its share value.

Ant Group, owned by Alibaba, has finally announced its long awaited IPO, with a dual listing on the Shanghai and Hong Kong bourses; its listing had been delayed until the country’s dominant mobile payments company had “secured the full support of Beijing”. Two years ago, Ant was valued at US$ 150 billion but now it seems that the valuation will be on the top side of US$ 200 billion. Although it has changed its name from Ant Financial to Ant Group – and stressing that it is primarily a tech company – it still has 600 million users depositing funds into its Yu’E Bao money market fund, as well as providing digital financial services, such as online lending and insurance.

The ATO has summarised the results of the 14.3 million Australians who completed their tax returns for the year 2017-18, and interestingly seventy-three of the country’s millionaires did not pay any tax and the richest Australians earned thirteen time more than the poorest. The study also noted that the Sydney’s Double Bay was the suburb with highest average taxable income, at US$ 170k and Queensland’s Muttaburra the lowest at US$ 10k. The report also looked at taxable income with the medical profession – including surgeons, anaesthetists and internal medicine specialists – taking the top three highest incomes, with the first at US$ 282k. The lowest-earning professions were dominated by hospitality, with fast food cooks at the bottom of the ladder with a taxable income of just over US$ 13k. 14.9k Australians posted taxable incomes of over US$ 700k (AUD 1 million) and averaged a total tax rate of 42.5% , although seventy-three “millionaires” did not have any tax to pay. However, this group did make tax-deductible gifts and donations totalling nearly US$ 1.0 billion.

The report also confirmed that negative gearing remains a popular tax break, with 59% of the country’s 2.2 million landlords declaring a net loss on their investment properties. 81.8% of landlords had mortgages from which they could claim interest paid as taxable deductions. The average landlord claimed US$ 9k, US$ 3k and US$ 7k, for interest, capital works and “other deductions”, totalling US$ 19k on income of US$ 15k. It does seem strange that overall there were rental losses of US$ 85 million claimed but only US$ 14 million profit reported.

There are concerns that at least 1k Australian businesses could be engaged in insolvent trading, as government stimulus measures may be keeping these zombie businesses afloat. Recent data has seen about 8k companies going into administration every year – latest figures show that, despite Covid-19, that number is 7.2k – 12% lower than the previous year. There are real fears that companies still trading, when technically insolvent, can rack up additional debts that may never be repaid when they finally go under. The Australian Restructuring Insolvency and Turnaround Association estimates that at least 20% of Australian businesses, trading through the pandemic, may be in the position where they would otherwise be trading insolvent without temporary legal changes, plus government and bank financial support.

Such companies have also benefitted from the JobKeeper scheme, without which the country’s unemployment level would be north of 11% from its current 7.0% level. Worryingly, latest statistics point to the fact that there are thirteen job hunters for every vacant position across the nation and one recruiting firm estimates that the average number of applicants for each job is now nearing three hundred. The pandemic has indeed knocked business confidence on the head and with it reluctance to hire until times get better – a typical chicken and egg scenario.

Following the government’s U-turn in relation to the operations of Huawei in the UK, it seems that the Johnson administration may bow to US pressure and ban TikTok’s plan to base its international HQ in the country. It is reported that Washington may only allow ByteDance, TikTok’s owner, to keep operating if it splits from China and becomes a US company. Discussions continue between the UK’s Department for International Trade and the Chinese video sharing app, but tensions between the two governments remain high and there are fears that the Huawei spat may expand a tit-for-tat economic war. Australia has had major problems with China and has suffered economically as a consequence and if that were to happen with the UK, then that would spell big trouble for the economy.

Just like some Parisian streets, the EU has managed to cobble together an agreement on a massive US$ 1.2 trillion stimulus package for their coronavirus-blighted economies, after five days of oft-bitter arguments. Any deal was held up by a group of fiscally frugal northern nations, led by the Netherlands, who were against the amount of the package that would be spent on free grants rather than loans. It was no surprise that two of the leading proponents for dishing out grants were France and Poland. Evidently, Emmanuel Macron was so upset at “sterile blockages” by the “frugals”, that he reportedly banged his fist on the table (sacre bleu) and Polish Prime Minister Mateusz Morawiecki branded them “a group of stingy, egotistic states”. It is no surprise to see his country being the top beneficiary of the recovery package, receiving tens of billions of euros in grants and cheap loans. Other ‘fudges’ to the original proposals saw the non-repayable grants being cut by US$ 180 billion to US$ 635 billion and the same amount added to the original repayable loans balance, whilst Hungary and Poland, who were going to veto the agreement if funds were made conditional on upholding democracy, got away with diplomats patching up some sort of agreement. Go Your Own Way!