It’s Not Over Yet!                                                                              13 August 2020

The big news of the week sees the UAE and Israel signing a historic peace agreement – a deal that will normalise diplomatic relations between the two countries. A joint statement between the two countries – and the US – indicated that the “breakthrough will advance peace in the Middle East region”. The agreement will also see Israel stop further annexation of Palestinian territories and the two countries “agreed to cooperation and settling a roadmap towards establishing a bilateral relationship”. There is no doubt that collaboration between the two countries will also result in closer economic and security ties but there will be the inevitable problems along the way.

Q2’s Mo’asher report pointed to a strong July, with returns similar to pre-Covid levels of late February/early March, amid signs of a V-shaped recovery. The figures, released by the Dubai Land Department and Property Finder, noted June and Q2 transactions and values of 2.4k at US$ 1.3 billion and 5.6k, valued at US$ 3.0 billion, respectively – and this despite the fact that the sector was as good as closed for the whole of April and a good part of May. In Q2, 60% of transactions involved off plan sales, with the balance from the secondary market. There is market confidence that H2 will see growth in the sector. The index uses 2012 as the base year and in June, the quarter showed a marginal monthly decline to 1.113 but increases of 0.79%, quarter on quarter and a 15.3% jump since 2012; in June, the index value was US$ 289k, down 0.09% since January 2020. YTD, the index for villas/townhouses was 1.79% lower at US$ 444k and apartments up 0.58% to US$ 280k.

Further good news for some with mortgages was that the six-month and one-year EIBOR rates dipped this week to 0.699% and 0.941% from 01 January openings of 2.2% and 2.8% respectively. Three-monthly, monthly and weekly rates also fell to 0.46%, 0.26% and 0.15%.

According to Savills’ latest global report, Dubai’s H1 prime property market declined 3% which on a worldwide scale edged 0.5% lower and 0.8% for the year – the first time that this index has posted negative returns since 2008. With values averaging US$ 560 per sq ft, Dubai’s prime market continues its six-year plus downward trend, albeit at a reduced pace, and presents a buying opportunity, with comparatively high yields for investment grade properties on the international stage. With rates at historically record lows, recently relaxed loan-to-value norms and a slowdown in new project pipelines, there are indicators that the sector could well improve in H2. The Savills’ report noted that Seoul, (5.5%), Moscow and Berlin were the three cities with the biggest value increases, whilst Mumbai recorded the steepest H1 decline, with a 5.8% drop followed by Los Angeles, 4.7% lower, and the world’s most expensive city, Hong Kong, down 4.2%.

Amazon has expanded its 2019 Project Zero programme, which is focused on tackling counterfeiting, to seven new countries, including the UAE, bringing its total locations to seventeen countries. Its main aim is to ensure that all goods traded through Amazon are authentic and not fake products. The tech company, having spent US$ 500 million last year to attain its target, confirmed that “as a result of our efforts, 99.9% of all products, viewed by customers on Amazon, have not received a valid counterfeit complaint.” It is estimated that the amount of global counterfeiting worldwide will top a staggering US$ 1.82 trillion by the end of the 2020. Earlier in the year, US House of Representatives passed a bill that will make online marketplaces responsible if customers buy fake goods on their platforms.

In Dubai, July’s IHS Markit Purchasing Managers’ Index returned to positivity with a 1.7 rise to 51.7, driven by a solid increase in new work, as restrictions are being lifted and green shoots of a recovery appearing. This was the first expansion in the emirate’s non-oil private sector in five months. Consumer demand improved and additional sales resulted from the resumption of international flights, the reopening of tourist destinations and enhanced government support; in July, it introduced a further US$ 409 million economic stimulus package, bringing the total support given to businesses to US$ 1.7 billion. Although travel and tourism understandably lagged behind, there was a marked uptick in construction and wholesale/retail. However, July witnessed a fifth successive fall in employment, with reports that current workforce numbers remained weak because of tight corporate cash flows.

In a bid to further underpin the troubled pandemic-hit economy, by enhancing its support to the banks, the Central Bank has introduced further measures to boost its Targeted Economic Support Scheme, launched in March. The agency has decided to relax banks’ structural liquidity positions by easing both the Net Stable Funding Ratio and the Advances to Stable Resources Ratio, both by 10%, and effective until December 2021. NSFR, which is mandatory for the country’s five largest banks, allows those institutions to go below the 100% threshold, but no lower than 90%, whereas ASRR applies to all other banks which will be allowed to go above the 100% threshold, but not higher than 110%. These measures are aimed at encouraging banks to strengthen the implementation of the TESS and support their impacted customers, through the Covid-19 crisis, and to ensure the smooth flow of funds from banks into the economy.

One company has actually posted a profit increase in H1 – Oman Insurance made a 4.0% hike in net profit to US$ 30 million, whilst increasing its solvency above 250%. Over the period, the net investment income increased 5.0% to US$ 16 million, as total Gross Premiums Written, GPW, were 3.0% higher at US$ 572 million. The US-based credit rating agency AM Best has updated the company’s outlook to stable from negative, with an ‘A’ rating, whilst both Moody’s and S&P maintain ratings of ‘A2’ and ‘A-’ respectively.

With earnings badly impacted by lower receipts from its healthcare investments, and a one-off US$ 4.0 million provision related to “aged receivables”, attributed to Sukoon International, Amanat Holdings posted a Q2 loss of over US$ 1 million, compared to a profit of US$ 4 million in the same period last year; over H1, the healthcare and education business just about broke even, with a US$ 158k net income, from almost US$ 10 million in H1 2019, on the back of a 5% hike in revenue to US$ 25 million.

Shuaa Capital posted H1 operating income of US$ 73 million and a US$ 2 million profit, with no comparable 2019 figures because the Dubai asset manager merged with Abu Dhabi Financial Group last year. Q2 operating income was at US$ 23 million, with assets under management nudging 1.6% higher to US$ 13.0 billion, quarter on quarter. Over the past twelve months, the firm has realised a 38% downsizing in its non-core asset unit, “releasing in excess of US$ 35 million of cash through exits”.

Amlak posted a H1 US$ 21 million loss, compared to a US$ 1 million profit for the same period in 2019; however, its Q2 results pointed to a US$ 16 million profit. According to the mortgage provider, it still has accumulated losses of US$ 499 million, most of which relate to impairment costs taken on price declines on investment properties, then valued in 2014 at US$ 801 million. In January 2019, Amlak entered renegotiations with its financiers on the restructuring terms agreed in 2014 and subsequently revised in 2016.

Emaar Properties posted a 35% fall in H1 profit to US$ 545 million on the back of a 22% revenue dip to US$ 2.45 billion, whilst selling, marketing, general and administration expenses declined 5% to US$ 545 million. In the first six months of 2020, the emirate’s largest listed developer, by market capitalisation, made property sales of US$ 1.4 billion. At 30 June, the company had delivered a cumulative total of 64.7k residential units and is currently involved in developing 40k residences, of which 11k are overseas; its UAE sales backlog was valued at US$ 8.0 billion, with US$ 3.3 billion of international projects in the pipeline.

Its two main subsidiaries posted H1 declines with Emaar Development’s revenue and profit down 59% to US$ 1.3 billion and 76% lower at US$ 272 million respectively. With slumping revenues, arising from lockdown measures, it was no surprise to see Emaar Malls, posting a 69% fall in H1 profit to US$ 94 million, as revenue dipped 26% to US$ 436 million, with sales and general administrative costs coming in 16% higher at US$ 83 million. However, because of the “higher rate of online shopping, coupled with exponential growth in the Saudi market”, its regional e-commerce platform, Namshi, acquired last year, posted a 57% hike in revenue to US$ 181 million. Despite the pandemic, the operator continued its redevelopment plans, including the 95k sq ft Meadows Village mall set to complete later this year.

Damac Properties posted quarterly and H1 losses of US$ 76 million and US$ 105 million, compared to profits of US$ 14 million and US$ 22 million, over the same periods last year. Although revenue climbed 27% to US$ 654 million, with booked sales of US$ 286 million, impairment on development properties stood at US$ 119 million. At the end of June, Damac had a gross debt of US$ 954 million, with a US$ 1.2 billion cash balance, and during the period handed over its 30,000^th property. Damac’s chairman, Hussain Sajwani, commented that his company’s “focus remains on selling completed and near completion inventory,” and that he is “optimistic that the lead up to the Dubai Expo at the end of 2021 will allow some of the excess real estate supply be absorbed”.

Deyaar released disappointing H1 results indicating a 77% slump in profit to just over US$ 2 million, not helped by a 66.4% hike in impairment costs to US$ 327k; revenue declined 48% to US$ 48 million. Q2 profit also slid – by 68% – to under US$ 2 million, driven by a 53% revenue decline to US$ 21 million and finance costs 64% higher at under US$ 3 million. The developer, with Dubai Islamic Bank its major shareholder, is currently working on its 75% completed Bella Rose project in Al Barsha South and expects to start work soon on the third phase of its Midtown residential project, comprising seven buildings. In April, the company restructured its capital base, reducing its equity by 21.3% to US$ 1.2 billion.

Embattled Union Properties received a boost this week with an agreement to restructure a US$ 257 million debt with Emirates NBD, its principal creditor, which includes payment of an initial amount. The improved terms will enable the developer to reduce its debt instalment payments, improve its already tight liquidity and focus on the development of its activities and projects. These include the recently announced new project, Motor City Hills – a development next to the Dubai Autodrome, including 195 villas, 490 townhouses and six commercial land plots – and a US$ 54 million expansion of the Dubai Autodrome. It is also transforming three units – ServU, The Fitout, and the Dubai Autodrome – into private joint stock companies, as it reorganises its business to cut costs.

The bourse opened on Sunday 09 August and, 57 points (2.8%) higher the previous week moved up a further 47 points (2.2%) on the week, closing on 2,155 by 13 August. Emaar Properties, US$ 0.03 higher the previous week, closed up a further US$ 0.03 to US$ 0.76, whilst Arabtec, up US$ 0.14 the previous five weeks, shed US$ 0.04 to US$ 0.26. Thursday 13 August saw the market trading at 330 million shares, worth US$ 123 million, (compared to 297 million shares, at a value of US$ 80 million, on 06 August). 

By Thursday, 13 August, Brent, US$ 5.47 (14.3%) higher the previous four weeks closed up US$ 1.26 (2.9%) at US$ 45.01. Gold, having climbed US$ 269 (14.9%) the previous three weeks, gave back the US$ 109 (5.3%) gain of the previous week to close on US$ 1,960, by Thursday 13 August.  The International Energy Agency has cut its 2020 oil consumption forecast again – this time by 140k bpd – to 91.9 million bpd and expects it to move higher to 97.1 million bpd next year. The agency attributes the decline in demand to the continuing spread of the virus and does not expect that to return to its pre-Covid-19 level of 100 million bpd for some time or prices returning to anywhere near US$ 70, posted before the onset of Covid-19.

Having retrenched 4k staff in May – and now cutting a further 2.5k from its payroll – Debenhams has lost a third of its total payroll as it struggles, like many of its peers, with the ravaging impact of Covid-19. This time, the jobs lost will be mainly across its UK stores and distribution centre but there will be no further shop closures of the 124 stores that have reopened post lockdown, apart from the twenty that were slated to shut following the onset of the pandemic. In April, the retailer entered administration for the second time in 2020.

In a case of déjà vu, for the second consecutive time, Mike Ashley’s Frasers Group – formerly Sports Direct – has held up its annual results which should have been released today, 13 August, for at least another week. Last year, the company’s 2019 results were delayed by a week and then subject to continuous deferrals thereafter before releasing annual results that included the shock news of a US$ 760 million tax bill from Belgian authorities. The company has been keen to reassure investors the delay was not because of any problems and that it was due to “final IFRS 16 disclosures still being completed and reviewed”. (IFRS 16 is an International Financial Reporting Standard relating to the accounting of leases, which specifies how they must be recognised, measured, presented and disclosed).

There was some good news and bad news for Tui this week. The German travel posted a US$ 1.3 billion Q2 loss, as the lockdown brought the travel industry to a halt and, after announcing late last month, that it would shut 166 High Street outlets in the UK and Ireland as summer bookings were 81% lower (made worse by new travel  restrictions for Spain – and possibly soon France and the Netherlands), and 40% down for a scaled-back winter programme.. But the good news was the firm announcing there had been a marked increase in 2021 bookings – up by a “very promising” 145% – and the fact that it had cut a compensation deal with Boeing over the prolonged grounding of 737 Max planes, including a deferral of 61 aircraft deliveries.

It seems that Japan’s 7-Eleven has taken a massive gamble by paying US$ 21.0 billion for Speedway, the US petrol chain owned by Marathon Petroleum. The bid was more than US$ 4 billion than those of their two main competitors – UK’s EG Group and Canada’s Alimentation Couche-Tard – with similar offers in the region of US$ 17.0 billion. It appears that these convenience chains are more interested in selling coffee, grocery and fast food items which have over the years gained revenue traction as fuel sales, as a percentage of total turnover, have declined. The Japanese interloper has been involved in over forty deals since 2006 to become the US’s top operator of convenience stores with over 9k outlets.

Uber Technologies Inc posted a net US$ 1.8 billion Q2 loss, which included costs associated with laying off 23% of its payroll. Revenue fell 29% to US$ 2.3 billion, as the number of active platform users nearly halved to 55 million, year on year. Although there was more than a doubling in demand for its food-delivery service, to US$ 1.2 billion, demand for ride-hailing trips, which accounted for 66% of its turnover, has only marginally recovered, up by 5%, from its rock-bottom April figures. However, Uber is still confident of becoming profitable by the end of 2021.

There was much surprise when it was reported that Eastman Kodak was granted a US$ 765 million loan from the Defence Production Act, in collaboration with the US Department of Defence, late last month. Then it was explained that it was intended not only to speed up production of drugs in short supply, and those considered critical to treat Covid-19, but also to  restore the troubled camera company that had lost focus, after once been the leading player in the photography industry. Now that loan is on hold pending investigations into allegations of wrongdoing, probably on two fronts. The first obvious one is whether Kodak could handle large scale pharmaceutical manufacturing, whilst the other will centre on whether some of the board used information to buy shares before the announcement was made as Kodak stock values jumped 2,760%.

At the beginning of the week, the US economy received good news on two fronts. With a 10bp fall to 2.88%, US mortgage rates have dropped, (for the eighth time since the onset of the virus), to their lowest ever level, in a move that could well boost the housing market, battered by Covid-19, by “giving potential buyers more purchasing power and strengthening demand.” Part of the fall can be attributed to two acts by the Federal Reserve – maintaining its near to zero benchmark rate and buying mortgage bonds, as part of its plan to stimulate the economy.

July unemployment rates fell again from 14.7% in April and 11.1% last month to 10.2%, as payrolls rose higher than expected by 1.75 million, better than the market’s expectations of 1.48 million. However, it must be noted that employment remains about thirteen million lower than the pre-Covid-19 level and the country being the worst affected major global economy, with over five million infections (26% of total global cases), and 163k deaths. Further bad news saw stimulus negotiations between the Republicans and Democrats on the brink of collapse.

June industrial production in the eurozone increased by more than expected with Spain, France and Germany posting monthly gains of 14.0%, 12.7 and 8.9%, although year on year figures are still well down by 14.0%, 11.7% and 11.7% respectively. Chances of a quick recovery have been reduced, with several countries posting a resurgence in Covid-19 cases that may have a negative knock-on impact on short-term growth prospects. Not surprisingly, Germany seems to have had the strongest recovery of all eurozone nations, but the volume of trade remains 10% lower than this time last year. However, a lot of German exports are reliant on their eurozone partners’ economic health and these figures indicate there is some way to go for the country to return to some form of trade normalcy. For example, Spain has seen its GDP decline 18.5% in Q2, resulting in one million Spaniards losing their jobs.

The EC President has confirmed that restrictions on national budgets, already suspended in March because of the onset of Covid-19, will continue until 2022, mainly because of the on-going economic uncertainty, made worse by a recent resurgence in cases that may lead to an unwanted second wave. At the time, Ursula von der Leyen said that the step was necessary to cope with “the human as well as socio economic dimension” of the pandemic. The budget rules, often “bent” in times of various crises to meet the bloc’s then requirements, are that any budget deficit to be less than 3% of GDP and public debt to be lower than 60% of GDP.

Last year, remittances overtook foreign direct investment as the biggest source of external financing for many nations, with a reported US$ 545 billion involved; it is estimated that because of Covid-19, the 2020 figure will be 18.3% lower to the tune of around US$ 100 billion. For example, it is estimated that nine million Filipinos work overseas but their remittances fell by 20% in the year to May, at a time when Covid-19 will see up to 750k repatriated because of overseas retrenchments, whilst many others overseas have seen pay rates cut. The end result is that domestic consumption will decline in the country with a negative knock-on effect for the Filipino economy,  as less is spent on the likes of construction, food and education.

Another leading political figure in Malaysia is in legal trouble and has been charged with corruption, involving a US$ 1.1 billion undersea tunnel project. Lim Guan Eng, the country’s former finance minister, has been charged with soliciting 10% of potential profits in 2011, as a bribe for the project planned in northern Penang state where he was the chief minister from 2008-2018, before his move to the federal government. This week, he has been accused of abusing his power as Penang chief minister to obtain US$ 800k, as an inducement to help a local company secure the 7.2 km tunnel project contract. He has pleaded not guilty but could face up to twenty years in jail and a fine, if found guilty.

Australian wages only grew 1.8% in the year to June 2020 – their slowest pace since records began in 1997 – with the private sector wages bearing the brunt of the slowdown, driven principally by a number of large wage reductions across higher paid jobs. Although public sector wage growth was stronger, which helped to keep inflation positive, it still declined to 2.1%. Industry-wise, the largest wage declines were seen in “other services” (-0.9%), construction (-0.5%) and professional, scientific and technical services (-0.5%) and on the flip side, the “winners” were in utilities (0.6%), education (0.5%) and mining (0.5%). The pace of the wages slowdown surprised analysts but what is certain is that worse is to come, given the depressed economic environment. Another surprise was that consumer confidence in NSW, down 15.5% to 77.8 was worse than Victoria, (down 8.3 to 78.0), which has just imposed stage 4 restrictions in Melbourne; these levels are only slightly better than those recorded in April when the country entered the early stages  of a national lockdown. A level of over 100 means the level of optimism is outweighing pessimism.

According to the Bureau of Statistics, there were more than one million Australians unemployed in July – a marginal monthly increase of 16k – with an unemployment rate of 7.5%, the highest level since 1998. It is estimated that if the Morrison government had not introduced JobKeeper, the unemployment rate would be at least 8.3%; if those people that have lost their job and exited the workforce since March, and the 165k counted as employed, but working zero hours, the rate rises to around 10%. However, almost 115k new positions (44k full-time and 71k part-time) were created in July. But the extent of economic scarring will become more obvious when JobKeeper is withdrawn and the true unemployment rate becomes apparent.

Since peaking at 6.9 million in late March, the number of Americans filing new claims for unemployment fell below 1 million for the first time since then, with the latest 963k figure down from the 1.3 million last week. Prior to the onset of Covid-19, the highest number of new jobless claims, at 695k, occurred in 1982. Although down from the pandemic peak of 14.7%, the 10.2% unemployment rate is still unacceptably high which may result in more stimulus money being pumped in by the Trump administration more so because of the looming November presidential election. However, 20% of US workers are still collecting benefits and that even though it seems that jobs recovery is gaining traction, the fact that twenty-eight million are still claiming some form of jobless benefits must be a worry to Donald Trump.

Q2 UK employment fell by 220k – the largest quarterly fall since 2009 at the height of the GFC. The Office for National Statistics noted that the youngest workers, oldest workers and those in manual occupations have been scarred most financially from Covid-19 and its lockdown. The figures would be even worse, but they exclude the estimated ten million that are on furlough, the one million on zero-hours gig contracts and those on temporary unpaid leave from a job. It will probably be October, when the government is scheduled to stop its US$ 52 billion furlough and self-employed income support schemes, before the full impact on the UK employment figures will be known. Furthermore, the number of people claiming universal credit – utilised by both those on low pay as well as unemployed people – rose 117% in the three months to July to 2.7 million, whilst quarterly pay levels dipped 0.2% – its first negative pay growth since records began at the turn of the century. In June alone, various sectors, including retail and F&B, announced further redundancies totalling 140k, whilst the number of self-employed fell by 238k to 4.8 million, about 14.5% of the workforce.

Although known for several weeks, the UK economy formally fell into recession, (technically two consecutive quarters of contraction), down 20.4% on the quarter – the country’s biggest slump on record. However, more positive news was that the economy actually grew in May and June, by 1.8% and 8.7% respectively – indicating somewhat of an economic bounce, although it must be noted that the economy is still a sixth lower than its February level and a fifth lower than it was in December 2019. The slump is not as bad as Spain’s 22.7% but almost twice as bad as those of Germany and the US but it must be remembered that the UK economy is more focused on services, hospitality and consumer spending – that accounts for a larger share of the economy – than most other advanced economies. Even Boris Johnson has warned “clearly there are going to be bumpy months ahead and a long, long way to go.” It’s Not Over Yet!