All The Young Dudes! 03 September 2020
There was a significant and historic move this week when the country’s President Sheikh Khalifa bin Zayed Al Nahyan issued a federal decree “abolishing the Federal Law No. 15 of 1972 regarding boycotting Israel and the penalties thereof”. This will undoubtedly lead the way to expanding diplomatic and commercial cooperation with Israel and from the date of the announcement “it will be permissible to enter, exchange or possess Israeli goods and products of all kinds in the UAE and trade in them.” It is inevitable that the decree will benefit many sectors, including trade, travel, tourism, e-commerce and energy and could act as a catalyst to a quicker economic recovery post Covid-19. There is every chance that the new relationship could see a marked improvement in the Dubai housing market, as Israelis may well see Dubai as an attractive investment prospect.
Latest data indicates that Dubai’s property sector contributes over US$ 4.2 billion to the emirate’s economy, equating to 7.4% of its GDP. There is no doubt that the latest peace deal with Israel – an untapped market – will benefit the sector which just before the onset of Covid-19 had shown signs of growth. There is every chance that Israel will be the source of an influx of new money which will push prices northwards, resulting in the disconnect between supply and demand diminishing. This will not only be via direct purchases of local real estate but Israeli investment in many sectors of the economy – including the four ‘Ts”, tourism, trade, travel and telecommunications – will prove a fillip for the emirate’s prosperity. This in turn will see an indirect benefit for the Dubai property market, as new businesses take root and more professional people and entrepreneurs move to Dubai which will absorb surplus inventory and create more demand for residential units.
The new report from the portal Property Finder shows that August, traditionally a slow month for Dubai real estate, posted 2.5k sales transactions, valued at US$ 1.3 billion – increases of 2.2% and 11.3% on a monthly and annual basis. The improvement in business has been put down to a combination of pent up demand, attractive pricing and the fact that many residents are eschewing their normal summer overseas holidays. A breakdown of the figures shows that 68.4% were in the secondary market, whilst 31.6% were off-plan, and that there were 1.2k mortgages, valued at over US$ 2.8 billion. As it seems that there are fewer new projects being launched, as the market tries to find equilibrium between the current over supply and demand, (estimated at 70k units), this has led to a 22.4% annual increase in the secondary market.
The Property Finder data found that there had been increased demand for larger units, as a direct result of the Covid-driven lockdown, whilst the volume of sales transaction for both studios and 1 B/R apartments declined by 34% and 10%, the volume of transactions for 3, 4 and 5-B/R apartments increased by 9%, 20% and 15%, respectively. The leading five off-plan transactions were found in Jumeirah Village Circle, Business Bay, Palm Jumeirah, Arjan and International City, whilst the main secondary market properties were sold in Town Square, Dubai Marina, Dubailand, Downtown Dubai and Dubai Sports City.
One of the few launches this year is Azizi Developments’ US$ 95 million, 587-unit Creek Views II on the shores of the Creek in Dubai Healthcare City. Prices for the 116 studios, 436 1 B/R and 35 2 B/R start at US$ 108k, US$ 152k and US$ 206k. The latest project will also feature two swimming pools, a sauna, a steam room, a fully equipped gym, and a children’s play area.
The recent Eid break proved a boon for Dubai hotels that had been witnessing very poor occupancy rates, some as low as 20%, for most of the summer. The last two weeks of August saw many properties reaching the 60% – and some up to 90% occupancy levels – during the Eid Al Adha. It is expected that average room rates will hover around the US$ 100 level into September, then moving higher, if – and when – the overseas holiday traffic gains traction from October.
In a major restructure, with the aim to increase efficiency and flexibility through strategic consolidation, the emirate has become Swiss-Belhotel International’s regional hub, as the group merges its Europe, Middle East, Africa (EMEA) and India regions. The Dubai-based executive team will now also be responsible for the group’s operations in Europe, whilst the flagship Swiss-Belhotel du Parc, Baden Switzerland will be the operational base for Europe.
There are reports that Emirates is to receive a US$ 2.0 billion government handout, as it tries to get to grips with the impact that the aviation sector has suffered from Covid-19. Not only have long haul carriers received the brunt of the fallout, that has seen the Dubai airline having to ground its 255-fleet of jets, comprising Airbus A-380s and Boeing 777s, but also this sector will almost certainly be the slowest to recover.
Earlier in the week, it was reported that Dubai could be returning to the debt market that would result in a potential sale of US$ 6 billion worth of ten-year sukuk and US$ 5 billion thirty-year conventional bonds. Money raised could be used to boost those sectors of the economy that have been badly impacted by Covid-90, including trade, finance and tourism. On Wednesday. the Dubai Government announced it has raised US$ 2 billion in an issuance process, comprising two US$ 1 billion tranches -a ten-year Islamic Sukuk, at a profit rate of 2.763%, and a thirty-year government bond, at an interest of 3.90%. The order book was more than five times oversubscribed than the target value which is an indicator of Dubai’s stature in the international community and the resilience of its economy; global investors made up 84% of the total investors in the government bond. (This week, neighbouring Abu Dhabi raised US$ 5 billion via a 50-year loan issue).
After moving into positive territory in July, the UAE economy slipped back from 50.8 to 49.4, (50.0 is the threshold between expansion and contraction). The PMI figures indicate that demand is still soft, whilst payrolls have been cut to reduce costs to a bare minimum just to keep afloat. Covid-19 and the lockdown have hit businesses on two counts – demand, in many cases, has fallen off the proverbial cliff, whilst those businesses still operating are facing fierce competition from their like-minded peers. For some sectors, it looks like a race to the bottom that sees no winners at the end. Business sentiment is low and expectations of an improvement over the next twelve months “dropped to the lowest since April 2012”. Reality maybe another matter – notwithstanding a second wave, some consider that Dubai will be one of the first global hubs to return to the new form of “business normalcy”.
Latest figures from the Federal Competitiveness and Statistics Authority seem to indicate that a post Covid-19 bounce has already started, as August consumer spending rose for the third straight month, coming in 63% higher compared to the March return. The better performing sectors were restaurants and apparel, 75% and 78% higher over the period respectively, whilst hotel spending was up 29%. Meanwhile, expenditure on food supplies and medications, both online and conventional purchases, slowed by 32%.
The emirate’s government has launched ‘Retire in Dubai’, a global retirement programme for those aged over 55. Initially, this will only be applicable for those who are already living and working in Dubai and offers an easy and hassle-free retirement option. Eligible applicants will be able to apply for a five-year renewable visa as long as one of the following three options are met – monthly income over US$ 5.5k, owning a property worth more than US$ 545k or having savings of over US$ 272k.
In a landmark move, July 2019 saw the federal cabinet approve 100% foreign ownership across thirteen sectors in 122 economic activities. Under this new foreign direct investment legislation, steelmaker Conares becomes the second company in Dubai to be granted 100% ownership in the mainland, following Aster DM Healthcare being allowed 100% ownership in its Dubai subsidiaries last February. The new facility, with an annual capacity of 100k metric tonnes, will cater mainly for regional infrastructure development projects. It is hoped that Dubai will slowly move to a value-added economy from its traditional trading/re-exports base and that the ‘Made in UAE’ logo becomes an everyday sign.
The agricultural sector has received bank financing, totalling US$ 209 million in H1, bringing the cumulative total to US$ 496 million. There is every reason why the country is investing heavily in the agricultural sector as intimated by Sultan Alwan, Acting Under-Secretary of the Ministry of Climate Change and Environment, saying “achieving food security and sustainability and ensuring flawless and flexible food supply chains for local markets are priorities of the UAE”. The country, which imports over 80% of its food requirements, is considered food secure, with the federal government having one of the most comprehensive plans in the world.
One sector that has been battered by the pandemic is flexible office space, as users have deserted “short-term desks” and coworking spaces to work from home. However, according to a recent JLL study, demand is beginning to pick up again now there are signs that the worst may be over (at least for the time being). The global study concluded that 67% of the respondents are still “increasing workplace mobility programmes and incorporating flexible space as a central element of their agile work strategies.” A further reason for the bullishness is that large companies are still concerned whether to commit capex budgets in the post Covid-19 environment and are moving towards pre-built space and lease flexibility. There is no doubt that Dubai’s economic future will owe a lot to the expected inflow of entrepreneurs, freelancers and start-ups, many of whom will be traditional users of flexible office space to save on commercial rent. Over the past six years, Dubai’s flexible office space has more than tripled to 160k sq mt, serviced by more than forty different operators, some of whom will not have survived over the past five months.
Compared to June 2019, UAE-operating banks this year has seen a 12.1% jump in debt securities to US$ 71.9 billion and a 3.4% rise, month on month; this move was a bid to counteract the decline in energy prices. However, the banks’ investments in stocks fell by 15.4% to US$ 2.4 billion, over the twelve months, whilst their portfolio of held-to-maturity bonds dipped 0.7% to US$ 27.4 billion on the month.
The Dubai Executive Council has issued a resolution with the aim of curtailing future competition between the government and private sector, to try and protect the latter’s interests. The new ruling details a legislative framework under which the private sector is protected from government entities and operates on a “level playing field”. In future, it looks as if government bodies will have to pay all relevant taxes and fees for which they are liable under federal and local laws, as well as being unable to receive any advantage or financial support from the government. Sheikh Hamdan bin Mohammed has stressed that government-owned companies should not “be a competitor to the private sector, but rather seek to complement it”, and that “we are keen that the private sector plays a major role in shaping the future of the national economy and achieving sustainable development”.
It was good news for global diamond hubs in Antwerp, Belgium, and Mumbai that after a moribund six months, when the business was at a standstill, it is reported that De Beers likely sold about US$ 300 million in rough diamonds last week. Although still less than a traditional sale, it is the biggest offering since February and equates to almost six times its total Q2 sales. With the likes of De Beers and Alrosa refusing to budge on prices since the onset of the pandemic, last week some diamond prices were slashed by up to 10%, leading to diamond buyers snapping up about half a billion dollars in uncut gems. The knock-on effect will be felt here in Dubai, which will benefit from any uptick in global trade. It has only taken fifteen years for the DMCC to become the third largest global diamond trading centre, with the government-backed Dubai Diamond Exchange managing to build on strong connections with producers in Africa, cutting centres in Asia and worldwide consumers.
DP World and Canada’s Caisse de dépôt et placement du Québec have agreed to invest a further US$ 4.5 billion in their global portfolio of ports and terminals, bringing their combined spending to US$ 8.2 billion. Established in 2016, the ports and terminals investment platform, between one of the world’s largest operators and the Canadian asset management firm, is keen to “working together on new investments that will connect key international trade locations worldwide.” The Dubai ports operator has been recently involved in acquiring numerous global logistics operations, including a 60% stake in South Korea’s Unico Logistics.
Over last week’s four days of trading on the DFM and the Abu Dhabi Securities Exchange, it is estimated that foreign inflows into the UAE’s twin bourses amounted to US$ 668 million, accounting for 48.3% of the total liquidity recorded. Of that total, the Dubai bourse claimed US$ 327 million, with the banking sector the main target on account of their normal lucrative annual dividends.
Dubai logistics firm Fetchr has raised US$ 15 million in its third funding round that will assist its expansion plans for China, Europe and the US and its aim to attain its break-even EBITDA point this year; it expects to attract a further US$ 10 million before the end of the year. Among this round of investors were Beco Capital, Tamer Group (who also invested in the first round of funding in 2018) and CMA CGM, along with its logistics arm CEVA Logistics, (who joined in early 2019). The pandemic resulted in a marked slowdown in funding for start-ups but now it is picking up momentum; H1 saw MENA funding top US$ 659 million – 35% higher, year on year. The courier company is also considering strategic partnerships with global service providers and large retailers and implementing an asset-light business model for accelerated growth. Fetchr will also benefit from a major boost in the on-demand delivery sector due to Covid-19, with figures indicating that 90% of consumers in Saudi Arabia and the UAE – two of Fetchr’s core markets – now purchase online.
Every week sees another episode in the on-going NMC Health saga, as it faces yet another legal battle – this time Pine Investments are seeking the restitution of a 49% stake sold to NMC Health in 2018, the founders of an IVF business, which was sold to the company, say it failed to honour an agreement with them. Dr Michael Fakih, his wife and co-founder Dr Amal Al-Shunnar, the founders of an IVF business, sold their company to NMC – via a 2015 sale of a 51% stake, followed three years later by the remaining 49%, which was sold for US$ 205 million, valuing the company at US$ 409 million. The payment for the second stake was a mix of cash and shares and the sellers only agreed to accept a bigger proportion of shares on its then chief executive, Prasanth Manghat’s guarantee that the company would make good any shortfall if NMC’s share value dipped below US$ 38.50. Earlier in the year, the claimants sold a small portion of shares at below the guarantee and in February wrote to the company to seek US$ 7 million – the difference between the lower sale price and the guarantee – and also to offload their remaining shares at the guarantee price.
The bourse opened on Sunday 30 August and, 185 points (10.6%) higher the previous three weeks moved up a further 14 points (0.6%) on the week, closing on 2,283 by 03 September. Emaar Properties, US$ 0.10 higher the previous four weeks, was up a further US$ 0.01 to US$ 0.81, whilst Arabtec, dumping US$ 0.13 the previous three weeks, gained US$ 0.02 to US$ 0.19. Thursday 03 September saw the market trading at 373 million shares, worth US$ 97 million, (compared to 339 million shares, at a value of US$ 102 million, on 27 August). For the month of August and YTD, the bourse had opened on 2,051 and 2,765 and, having closed the month on 2,245, was 194 points (9.5%) higher but well down by 18.8% YTD. Emaar and Arabtec both traded lower from their 01 January starting positions of US$ 1.10 and US$ 0.35 – down by US$ 0.32 (29.1%) and US$ 0.17 (48.6%) YTD. However, in the month of August, Emaar was up US$ 0.08 at US$ 0.78, whilst Arabtec headed in the opposite direction, down US$ 0.07 to US$ 0.18. Trading on the last day of August was markedly higher with 450 million shares, valued at US$ 376 million.
By Thursday, 27 August, Brent, US$ 6.81 (17.8%) higher the previous seven weeks lost US$ 1.37 (3.0%) to US$ 43.72. Gold, having lost US$ 136 (6.6%) the previous fortnight, nudged US$ 9 higher (0.4%) to close on US$ 1,942, by Thursday 03 September. Brent started the year on US$ 66.67 and has lost US$ 21.39 (32.1%) YTD but gained US$ 1.96 (4.5%) during the month of August to close on US$ 45.28. Meanwhile the yellow metal gained US$ 461 (30.3%) YTD, having started the year on US$ 1,517 to close at the end of August on US$ 1,978 from a year start of US$ 1,517, with August prices nudging US$ 2 higher.
It has been confirmed that Goldman Sachs has made the US$ 2.5 billion payment to the Malaysian government to settle allegations of fraud and misconduct relating to the 1MDB scandal. The money will be used to repay some debts of the disgraced fund which includes bonds totalling US$ 3.5 billion due over the next three years.
IATA has reported that July global air cargo demand was stable but remained 13.5% lower than the same month in July 2019, due to capacity constraints, as passenger aircraft remained grounded. With a year on year 31.2% fall in global capacity – slightly better than the 33.4% June drop – these figures do not reflect what is happening on the global stage, where indicators point to an improvement in the global manufacturing sector, with upticks in new export orders and output. However, until national borders are opened, travel returns to some form of normalcy and more planes return to the skies, air cargo will continue to suffer. ME carriers reported a 14.9% annual decline in international cargo volumes in July, an improvement from the 19% fall in June, as seasonally-adjusted demand grew 7.2% month-on-month in July – the strongest growth of all global regions.
EU aviation regulators confirmed that scheduled flight tests on Boeing’s troubled 737 Max (now known as 737-8) will start next week but have noted that US Federal Aviation Administration clearance will not automatically transfer to clearance to fly in Europe; US testing restarted two months ago but the scheduling the test flights by European regulators has been hindered by Covid-19 travel restrictions between Europe and the US. However, the EASA indicated that it had been “working steadily, in close co-operation with the FAA and Boeing, to return the Boeing 737 Max aircraft to service as soon as possible”, and wanted to ensure that the overall maturity of the re-design process was sufficient to proceed to flight tests. This is not the only model to be causing Boeing problems – it has found “two distinct manufacturing issues” affecting the fuselage of eight 787 Dreamliners that need urgent investigation.
Last week, the blog pointed out some of the UK politicians who were making extra money outside their normal constitutional labours. This week, it is reported that the UK government have paid large consulting firms over US$ 145 million for advice on its response to the pandemic! A total of 106 contracts have been handed out since March. It appears that government contract award notices must be published within thirty days, but some have remained secret for up to three months. A US$ 750k McKinsey contract was for advice on “the vision, purpose and narrative” of England’s testing programme, whilst Deloitte was appointed to manage PPE procurement but was criticised for delays in providing kit and other administrative errors. PwC did well obtaining eleven separate contracts, worth US$ 28 million, including advice to the British Business Bank on its business interruption loan scheme; PA Consulting received four contracts, totalling US$ 24 million, mainly for advising on the Ventilator Challenge project, whilst MullenLowe was the recipient of a US$ 21 million advertising campaign. Leaving the best to last was Public First which “has been awarded (three) contracts (worth over US$ 1.3 million) because of its wealth of experience”, one of which was to help ministers “lock in the lessons of the Covid-19 crisis”. Two of its directors had previously worked for Michael Grove, a current minister in the Johnson cabinet.
Going against the trend in the retail sector, Lego is set to open 120 shops this year, eighty of which will be in China. The iconic company, with 612 global stores, believes that there is a future for bricks-and-mortar stores, despite the statistics pointing otherwise. The Danish toy store announced a 7% hike in H1 revenue to US$ 2.4 billion that led to an 11% hike in operating profit; over that period, visits to its website doubled to 100 million, including one million adult fans signing up. The company has noted that more adults are getting involved in building Lego kits, whilst sales of the more complicated – and more expensive – big Lego sets grew 250%, as families looked for big projects to make together during lockdown.
Another UK High Street casualty could be Moss Bros who have hired KPMG to prepare the suit-maker for a company voluntary arrangement (CVA). With the likes of major events such as Royal Ascot and large weddings – the crux of their revenue stream – having to be cancelled because of Covid-19; business at their 125 stores has been almost non-existent. The chain, with 1k employees, was acquired by Menoshi Shina, who also owns Crew Clothing, for US$ 30 million in early March, who two weeks later tried unsuccessfully to cancel the sale after all non-essential retailers were ordered to close.
In a bid to reduce its cost base and amidst “high levels of uncertainty”, as to when trade will regain pre-pandemic volumes, Costa has said that 1.65k jobs are in danger and that the role of assistant store manager may be removed in its UK branches. Most of its outlets have reopened after the lockdown, but even with the government support, including VAT reductions, its August “eat out to help out” scheme and furlough, the coffee chain, which employs 16k in its wholly owned coffee shops, and 10.5k working in its franchise network, is struggling.
It is reported that Capita, is set to permanently close over a third of its UK offices and plans to end its leases on almost one hundred workplaces. The latest announcement could be considered another nail in the coffin of city centre economies, as the traditional office set ups have been turned on its head by Covid-19. It is ironic that Capita, a major government contractor, including the management of London congestion charges, chose the same day to announce these plans when the government prepares to launch an advertising campaign encouraging more people to return to workplaces. With a 45k workforce across the country, the company has noted that there will be “increased working from home, but they will still spend a significant amount of their time working from offices that are based in the heart of our local communities.” A recent BBC study found fifty major UK employers, including Lloyds, NatWest, Facebook, Fujitsu, HSBC and Twitter, had no plans to return all staff to the office full time and there are worries that city centres could easily become “ghost towns”.
Having already added 3k jobs to the UK economy, Amazon is planning to make it 10k by the end of the year, which will see the tech giant’s payroll numbers rise to 40k; the jobs will be full-time, paying at least US$ 12.50. During the upcoming festive season, the tech giant will hire 20k seasonal posts. Even before Covid-19, there was a clear trend indicating the rise in online-shopping and the slow demise of retail; the pandemic only highlighted the change, as the lockdown saw many High Street shops temporarily closed and massive expansion in online shopping. Indeed, July on-line sales were 50% higher than the February pre-pandemic levels. Tesco is creating even more positions than the US interloper, with 16k new permanent positions – it is estimated that it took the supermarket twenty years for online sales accounting for 9% of total turnover, and just twenty weeks to nearly double that to 16%. This is not all good news – notwithstanding the pandemic, retail jobs have dwindled by 106k over the past five years, during the time Amazon added 5k.
There were many analysts surprised to see that UK house prices rose to record highs last month, driven by the cut in stamp duty and pent up demand following the lifting of lockdown which saw the market effectively closed for April and May. Prices have bounced back 3.6% since June with August average prices reaching US$ 298k. This may be as good as the market gets because next month the government’s furlough scheme comes to a halt (and unemployment rates will head north), mortgage holidays are abating quickly and stamp duty will return to normal rates next April.
No surprise to see videoconferencing app Zoom’s Q2, to 31 July, revenue leapfrogging 355% to US$ 664 million, (beating market expectations of US$ 500 million), as profits more than doubled to US$ 186 million. Year on year customer growth expanded 458%. Shares hit US$ 325 – a record high – with the company revising its annual forecast to US$ 2.4 billion, up from US$ 1.8 billion. It managed to continue with its free services for many clients but more than doubled – to 1k – the number of high budget corporate clients that generated more than US$ 100k in revenue. However, the success has not come without its problems including some outages last week in many US schools, cases of hackers managing to hijack meetings and increased political scrutiny because it has 700 staff members, including most of its product development team, working out of China.
In 2017, Samsung heir Lee Jae-yong was convicted and sentenced to five years in prison for his role in using stock and accounting fraud to try to gain control of the Samsung Group, South Korea’s largest conglomerate. Although found guilty of separate charges over the deal including bribery, the prison sentence was later suspended. Now, the son of Lee Kun-hee, chairman of Samsung Group, (and the grandson of Samsung founder Lee Byung-chul), is facing fresh charges over his role in the 2015 merger deal between Samsung C&T and Cheil Industries. The 2017 conviction involved him being accused of using Samsung to pay US$ 36 million to two non-profit foundations, operated by Choi Soon-sil, a friend of Ms Park, in exchange for political support; the fall-out from this resulted in a political and business scandal that led to the resignation and conviction of former President Park Geun-hye.
Warren Buffett has bought himself an early 90th birthday present by acquiring almost 5% stakes in five Japanese trading companies – in Itochu Corporation, Marubeni Corporation, Mitsubishi Corporation, Mitsui & Company and Sumitomo Corporation- over the past twelve months. On Monday, these investments rose about 5% in Tokyo trading to equate to US$ 6.0 billion. His company, Berkshire Hathaway, valued at US$ 521 billion, seems to be currently focussing on the commodities sector, as seen by a July US$ 4 billion agreement to purchase most of Dominion Energy’s natural gas pipeline and storage assets in July. On most global markets, including Japan’s benchmark Topix index, falling commodity prices have seen valuations in the sector lower than the broader market, whilst offering relatively higher dividends. The nonagenarian seems to be betting against the market trend as, so far this year, foreign investors have withdrawn a net US$ 43 billion from the Tokyo bourse.
Because of ailing health, Shinzo Abe is to step down as Japan’s PM, a position he has held since 2012 that has made him the country’s longest-serving leader; ill health also caused the 65-year old to resign as prime minister in 2007. His decision to leave, with one year still remaining, was taken to avoid a political vacuum as Japan copes with the impact of Covid-19 and its economic fall-out. The prime minister was born into a Japanese political dynasty – his grandfather, Nobusuke Kishi, was a former leader, as was his great uncle, Eisaku Sato, (who was the country’s longest serving prime minister before his record of 2,798 days from 1964 to 1972 was broken), whilst his father, Shintaro Abe, was a former foreign minister. The front runner to take over as the country’s new prime minister is Yoshilide Suga.
Even before the advent of Covid-19, the Indian economy was showing signs of distress, including growth dipping to a six-year low of 4.7%, shrinking demand, debt-ridden banks and unemployment at a forty-five year high. Now its economy has witnessed its worst slump, since the country started releasing quarterly data in 1996, with Q2 figures contracting 23.9%, driven by a severe lockdown which brought economic activity to an almost standstill; it is inevitable that the economy will fall into recession by the end of the month – for the first time in forty years. (Two successive quarters of contraction lead to a technical recession). Despite posting 78.8k new cases on Sunday – and 3.6 million in total – it seems that the country has had to reopen for business; if not, the economic consequences would be a lot more damaging than the horrendous Q2 figures. Every segment of the economy – apart from agriculture which posted 3.4% growth – showed sharp contractions and it seems that the bad news will continue into Q3 because consumer demand, which contributes 60% of India’s GDP, will remain moribund, as much of the country will try and stay indoors whenever possible. The Modi government already has its own liquidity problems as public expenditure is heading north, whilst tax revenues are drying up so any further stimulus packages will have to be limited.
After four days of cyber-attacks, resulting in the Friday closure of its stock exchange, due to so-called “distributed denial of service” (DDoS) attacks, the New Zealand cyber-security organisation CertNZ has been called in to investigate. The bourse, with a near record high market of US$ 135 billion, confirmed its networks had crashed due to the cyber-attacks, which originated overseas; the modus operandi of such attacks is to flood the website with huge amounts of requests until it crashes.
Driven by a desperate July VAT rate cut by the Merkel administration, as it tried to stimulate its Covid 19 – ravaged economy, Germany’ annual consumer price index fell for the first time since May 2016; it fell 0.1%, year on year, having stagnated a month earlier in July. This figure is well short of the ECB’s target of keeping inflation close to but below 2% in the euro zone.
A report from Australia’s Banking Code Compliance Committee, created by the banking industry in the wake of a scathing royal commission into the sector, has concluded nearly 21k breaches of the new code had occurred within the six-month period to December 2019. The authority, which is not legally binding, also noted that 4.4 million customers were affected by bad behaviour or poor standards by the financial sector and that there had been 219 breaches involving deceased people being knowingly charged fees by banks. 72% of the reported cases involved just two (unnamed) banks and the toothless watchdog did not apply any of the limited powers it holds to sanction banks – enforced staff training, referring issues to the Australian Securities and Investments Commission or insisting on client repayment. The committee concluded that it was obvious that some of the banks were not taking reporting seriously, adding there was “substantial room for improvement”. Until they do it would appear that many banks will continue to take some of their customers for a ride and fail to engage with customers in a “fair, reasonable and ethical manner”.
Just as overseas investors seem to favour UAE banks, when investing in the local bourses, so do Australians who have more money invested in bank stocks than any other sector, either directly or indirectly, in the local market. The share price for NAB, ANZ and Westpac are all still around 40% below their February highs, whilst CBA has clawed back more ground and is down around 20%; although heading in the right direction, these increases are not as much as the rest of the market. Current conditions of record low interest rates and central bank stimulus both locally and globally have been supporting a rally on equity markets.
However, next month, the Morrison government will start withdrawing the JobKeeper payment and other measures that will see the federal government turning down the money tap so that instead of US$ 10.1 billion being pumped into households and businesses every month, the figure will now be US$ 2.2 billion. On top of that, the moratoria’ winding back of loan repayments, rent and evictions, as well as a marked increase in unemployment, will result in more trouble for the Australian economy – and with it the country’s banks’ turnover and profits. With borrowers’ confidence battered, despite the low rates and attractive offers, credit growth will slow and banks’ revenue streams will further dry because of net interest margins falling – as they are all vying for the same business in a competitive market – and many ditching credit cards to debit cards is further bad news for the banks.
Last week’s Federal Reserve’s decision to allow inflation to run above 2% in the future will have repercussions for Australians, starting with the currency. The dollar has risen by more than a third since its March nadir of US$ 0.55 and is likely to move higher (but at a slower rate) in the coming weeks from its current US$ 0.73 mark to settle by the end of the year, just shy of US$ 0.80. A strong greenback makes Australian exports more expensive and imports cheaper. The fact that it makes overseas holidays cheaper or makes inbound tourism more expensive, and less attractive to an overseas visitor, is currently irrelevant because the country is as good as isolated. The Fed decision on future inflation policy future is another reason for US equity prices to move higher and, the knock-on effect will be felt globally, including Australia. Furthermore, low rates will see many investors preferring to put money into the stock markets rather than historically low returns from US bond and money markets. Higher US market valuations will also be directly beneficial for Australian pension funds with exposure to US shares. The fact that the Fed is to keep interest rates lower for longer to encourage inflation to lift above 2% also has implications for Australia’s Reserve Bank which will have another reason to keep local rates at nearly zero. This will make borrowing costs low for probably at least three years – another positive indicator for the housing market.
Even without the onset of Covid-19, there was every likelihood that Australia would fall into recession this year, having already contracted 0.3% in the first quarter of the calendar year. At the start of 2020, an extreme bush fire season ravaged more than twelve million hectares – bringing tourism to its knees and thousands of small businesses losing months of essential seasonal revenue – and trade problems with China saw the economy beginning to struggle. Now with a 7.0% decline in the June quarter – the biggest fall since records began back in 1959 – Australia has plunged into its first recession since 1990, as it suffers the economic fallout from the coronavirus. However, the lucky country is doing better than most other advanced economies, including the UK, France, US and Japan, that have experienced bigger quarterly downturns of 20.4%, 13.8%, 9.5% and 7.6% respectively.
Late last week, the Federal Reserve indicated a roll out of an aggressive new strategy that aims to boost employment and let inflation rise higher for longer than in the past. Jerome Powell confirmed that the aim is to see inflation still average 2.0% – so if there is a period of inflation lower than 2%, the Fed would then make efforts to lift inflation “moderately above 2.0% for some time”, before considering a rise in interest rates. The Fed is set to use the central bank’s “full range of tools” to achieve its goals of stable prices and a strong labour market. This policy change suggests that the Fed will continue with rates hovering around the zero level for the foreseeable future, with some forecasting little change until early 2024. That being the case, it could be time for some investors to consider debt financing, with the cost of borrowing at such low rates.
With its share value climbing 4% in Tuesday’s trading, Apple’s valuation of US$ 2.3 trillion surpassed the total valuation (just over US$ 2.0 trillion) of the one hundred companies listed on the FTSE 100. Only two weeks ago, the tech giant became the first US company to be valued at over US$ 2.0 trillion and its value has more than doubled since March. Like other tech stocks, demand for their goods/services during the pandemic has surged, with an increasing number of people relying on technology during the lockdown to work and shop from home. In contrast, the London bourse is full of banks, oil companies and various old-world stocks, most of which have been battered by the impact of Covid-19, and has only one real tech stock, Ocado, in the index. No wonder then that it is 22% lower since January, whereas the Nasdaq hit record highs on Tuesday, having jumped over 100% since its March lows.
There are many who feel that the time is fast approaching for the global bourses to take a dose of realism. This happened on Thursday with shares in the big five US tech firms shedding between 4% – 8% om the day’s trading, with the tech-heavy Nasdaq down 5%. Despite this, the values of many companies and assets have been magnified because of stimulus measures, including QE (quantitative easing), and historic low interest rates, from the majority of the global central banks. Over the past six months the Nasdaq-100 has risen 38.2% to 11,879 and YTD returns 36.69% higher. Last month, the tech gauge continued to climb, and its Price Earnings Ratio reached what some consider a dangerously high level – 36 – for the first time since 2004 and well above the ten-year average of 22. Just maybe, this represents a permanent change that the global markets are inexorably changing from the old to the new digital and on-line era. Time for All The Young Dudes!