Get The Fire Brigade!                                                                        10 September 2020

Airolink has been appointed by Seven Tides as the main building contractor to complete its US$ 272 million Seven City JLT development. Due for completion in 2023, the 2.7k unit project covers an area of 3.5 million sq ft. Launched in 2004, Seven Tides is a privately-owned luxury property developer and holding company whose CEO is Abdulla Bin Sulayem, who has overall responsibility for the company’s portfolio of luxury five-star properties.

This week saw the lifting of the 192 mt long first section of the Link, now connecting the two towers of the One Za’abeel development. It took twelve days to raise the 8.5k tonne structure, one hundred metres above ground. Ithra Dubai, wholly owned by the Investment Corporation of Dubai, expects the Link to be completed next month, when the final 34 mt is added and, on completion, it will become the longest cantilevered building in the world. Encompassing a built-up area of 471k sq mt, the development will include the world’s first One & Only urban resort, with 497 ultra-luxury hotel rooms and serviced apartments, premium office space, 263 high-end residential units and three floors of retail space. One Za’abeel, due for completion by the end of next year, is the gate to the financial district of the DIFC, with an overhead link to the Dubai World Trade Centre.

Since the March onset of Covid-90 to the end of June, Emirates processed 1.4 million customer refunds, totalling almost US$ 1.4 billion, representing 90% of its backlog. It is also reported that Emirates will return their staff to full salaries as from next month. Earlier in the week, the airline announced that it had added another two routes, Lagos and Abuja, to its Covid-19 truncated schedule bringing its total destinations to eighty-four – more than a half of its pre-pandemic level of 160. The Dubai carrier will continue to restore revenues (and also target new avenues) and be as cost efficient as possible, as it tries to resume flights to all “network destinations” within ten months.

This week, HH Sheikh Mohammed bin Rashid Al Maktoum announced the formation of a Board of Directors of the Dubai Economic Security Centre. His Decision, effective from its date of issuance and will be published in the Official Gazette, will see Talal Humaid Belhoul, serving as the Chairman of the Board, and Awadh Hadher Al Muhairi as the Vice Chairman.

In line with the government’s smart transformation strategy, including the aims of the Dubai Paperless Strategy, the Dubai Land Department has started utilising AI in their smart valuation process for real estate units. The DLD’s Registration and Real Estate Services Sector has completed the project that will contribute to improving the quality, efficiency and readiness of smart government services. The target is for the DLD to raise its global ranking on performance indices in terms of providing DLD users the best valuation services quickly and with complete transparency. Customers can now download the app, Dubai REST, from the App Store or Google Play. The government body expects that this will reduce both current costs, by 20%, and implementation time to fifteen seconds.

DEWA has signed an agreement with Group 42, a leading Artificial Intelligence and cloud computing company, which will enable the three digital DEWA companies – Moro Hub, InfraX and DigitalX – to introduce and implement digital and data transformation initiatives, as well as fostering new services around AI. DEWA becomes the world’s first digital utility utilising autonomous systems for renewable energy, storage, expansion in AI adoption, and digital services. The authority, a Dubai 10X enabler, (a government tech initiative to ensure that the emirate is always ten years ahead of other global cities), will adopt digital technologies with its four pillars; Solar Energy, Energy Storage, Artificial Intelligence, and Digital Services.

At last Friday’s Global Manufacturing and Industrialisation Summit online, the Minister of Industry and Advanced Technology, Dr Sultan Al Jaber, reiterated that the UAE is looking to bolster its position in new high-value growth sectors such as biotechnology, health care and pharmaceuticals. Part of the strategy is also to enhance certain sectors, including water, health, agriculture, energy, petrochemicals and metals, so as to strengthen the country’s self-sufficiency. Technology will play an important role in the country’s move away from being hydrocarbon reliant and the government is keen to cooperate closer with any country that is ready and able to work with the UAE. The country is a pathfinder in certain areas of technology and was the first in the world to appoint a Minister of AI. The Minister stressed that “we can only hope to shape an inclusive and sustainable Fourth Industrial Revolution through building strong multi-stakeholder partnerships with representatives of national governments, multilateral organisations, the private sector, the research community and civil society.”

According to August’s Purchasing Managers’ Index, Dubai’s non-oil private economy is showing further signs of improvement. Business conditions continued to recover from the extreme effects of the pandemic, as output levels headed north, but the index did fall 0.8 to 50.9, indicating only a marginal improvement.  This would seem to indicate that the hopeful swift uptick may not result, as market conditions are still showing signs of depressed market conditions. The PMI covers three sectors – two of which, construction and wholesale/retail showed softer growth, whilst travel/tourism registered a downturn in business. Job cuts speeded up, as companies slashed costs, including the reduction in payroll numbers, to reduce capacity and employee costs. For the tenth consecutive month, margins continued to be pinched with companies chasing business by lowering selling prices.

The federal government posted a US$ 2.7 billion H2 budget surplus, including almost US$ 2.2 billion in Q2. In the first six months of the year, the government spent US$ 6.8 billion and collected revenue of US$ 9.5 billion. Last year, the cabinet had approved a three year zero-deficit US$ 16.7 billion budget. Q2 revenue topped US$ 9.5 billion, including federal revenue at US$ 4.5 billion and Ministry of Human Resources and Emiratisation chipping in over US$ 0.5 million. Expenses for the quarter came in at US$ 7.3 billion with the big four spenders being federal expenses, the Ministry of Education, the Ministry of Health and Ministry of Community Development at US$ 2.3 billion, US$ 0.6 million, US$ 0.4 million and US$ 0.1 million respectively.

DFM-listed Gulf Navigation has appointed a new board, headed by Theyab bin Tahnoon bin Mohammad Al Nahyan and a new group chief financial officer, Rudrik Flikweert. Shareholders are hoping that the new set-up will be able to turn the troubled business around, following tough trading conditions. Even before the advent of Covid-19, the company, with eight vessels, turned in an annual 2019 loss of US$ 82 million, driven by climbing operating costs and the carrying value of some of its vessels being written down by US$ 88 million. The pandemic has also exacerbated the Dubai company’s problems, as global trade contracts 27% in Q2.

The bourse opened on Sunday 06 September and, 199 points (9.5%) higher the previous four weeks, shed 12 points (0.5%) to close on 2,283 by 10 September. Emaar Properties, US$ 0.11 higher the previous five weeks, lost US$ 0.02 to US$ 0.79, whilst Arabtec, having gained US$ 0.02 the previous week, lost US$ 0.03 to US$ 0.16. Thursday 10 September saw the market trading at 284 million shares, worth US$ 111 million, (compared to 373 million shares, at a value of US$ 97 million, on 03 September).

By Thursday, 03 September, Brent, US$ 1.37 (3.0%) lower the previous week lost US$ 3.69 (8.4%) to US$ 40.03. Gold, having nudged US$ 9 (0.4%) the previous week, was US$ 11 higher (0.6%) to close on US$ 1,953, by Thursday 10 September.

After a disastrous Q2, when UK vehicle sales plunged to record lows, July recorded the first gain in sales for 2020, but then August vehicle sales dipped 5.8% to 87k, denting hopes of a recovery in the industry this year; for the first eight months of the year, registrations were down almost 40%. The UK is not alone with similar negative returns recorded across the EU, including France, Germany and Spain. The market is hoping that the market may be boosted by so-called revenge buying – when financially secure people buy luxury cars after saving money during the pandemic but were unable to go on an overseas holiday – along with pent up demand.

As it managed to avoid any further cancellations, Airbus delivered thirty-nine jets, comprising thirty-five A-320 narrow-bodied planes and four twin-aisle planes – ten lower than a month earlier. In contrast, Boeing posted disappointing news of only nine deliveries in the month, made worse with news that handovers of its 787 Dreamliners were slowed because of faults in the plane’s horizontal stabiliser that are wider than specified.  

After successfully completing a US$ 1.6 billion rescue plan, Virgin Atlantic announced a further 1.15k job cuts, in addition to the 3.5k jobs lost earlier in the year, which will see a 46.5% reduction in job numbers to 5.35k. The airline, 49% owned by Delta Airlines, commented that “until travel returns in greater numbers, survival is predicated on reducing costs further and continuing to preserve cash,” and that the outlook for transatlantic flights remains uncertain. Both US and UK courts approved Virgin’s US$ 1.6 billion rescue plan, involving U$S 525 million in new cash, half of which was generated from its main shareholder, Sir Richard Branson’s Virgin Group.

Last Friday, the largest group of Virgin Australia’s 10k creditors agreed to US private equity firm Bain Capital becoming the new owner of Virgin Australia; Bain have agreed to pay out all worker entitlements and honour travel credits, althoughbondholders lose out, probably seeing a meagre 13% return, as well as the “numerous suppliers and investors who will not receive all of the monies owed to them”. Furthermore, there will be no return to Virgin’s major shareholders, which include Singapore Airlines, Etihad Airways, China’s Nanshan Group and HNA and Sir Richard Branson’s Virgin Group. The airline, with a 9k workforce, having seen a third already made redundant, was placed into voluntary administration in April with debts of US$ 4.9 billion, following which its biggest shareholders, as well as the Australian government, refused to add further capital to save the airline. The airline will no longer be a full-service carrier, operating with a far smaller fleet, with up to sixty 737s airborne by the end of H1 2021, dependent on demand, and more limited routes The new airline will keep hold of its key international routes but will no longer operate as a full-service carrier like Qantas.

Singapore Airlines is the latest airline to announce massive staff cuts – by 4.3k, as it looks to restructure in line with the new norm for the industry including a weak travel outlook for the near future. The carrier expects the actual number will be 2.4k, once a recruitment freeze, natural attrition and voluntary departure schemes have been taken into account. Positions will be lost in all three of its flying units – Singapore Airlines, SilkAir and its low-cost carrier Scoot – which posted July passenger numbers down by 98.6%, year on year. Q2 losses amounted to US$ 820 million, compared to a US$ 80 million profit the previous July, with revenue falling 79.0% to US$ 620 million. SQ expects to operate only 50% of its capacity by year-end, with a reduced network to cope with the crisis.

BA has announced that it will be cutting more flights for the rest of the year as it comes to terms with the continuing collapse of air travel demand. IAG, which also operates Aer Lingus and Iberia, expects that autumn capacity will be 60% lower compared to 2019 figures. More worryingly, the company does not expect business to return to pre-pandemic levels until at least 2023. By the end of August, the airline had shed 8.2k of the 13k proposed job losses, “mostly as a result of voluntary redundancy”. IAG also confirmed that, in line with its July announcement, it would tap its shareholders for US$ 3.4 billion to help with its financing, debt reduction and withstanding a prolonged downturn in travel. Existing shareholders, including Qatar Airways, (with a 25.1% stake), will buy new shares at 36% lower than yesterday’s closing price.

LVMH is blaming the proposed US tariffs on French goods the raison d’être of pulling out of a proposed US$ 16 billion deal to acquire Tiffany, who have countered that the French conglomerate “is in breach of its obligations relating to obtaining antitrust clearance.” The French conglomerate indicated that a letter from France’s European and Foreign Affairs minister suggested “in reaction to the threat of taxes on French products by the US, directed the group to defer the acquisition of Tiffany until after 06January 2021”. The New York-based luxury jewellery retailer said there was no contractual basis for LVMH to honour the French government’s request and that LVMH just wanted to avoid its obligation to complete the transaction on the agreed terms because of the downturn in business resulting from the Covid-19 pandemic and  a sharp global downturn in the luxury goods industry.

Campbell is but one of several companies that can thank the onset of the pandemic for stirring up its business as once again its age-old canned soup brands become best-selling items in the supermarket. Q2 US soup sales came in 52% higher, contributing to the company’s 18% surge in revenue and a swing into profit. Initially, panic buying was the main revenue driver but now it seems that with families eating most of their meals at home, Campbell’s products – such as chicken soup, SpaghettiOs and Prego pasta sauce – are making somewhat of a resurgence. It seems that the company should now consider other products that could be eaten outside of the home – if not the soup will quickly turn cold and cans will start collecting dust on supermarket shelves.

Three of the biggest banks in the US have made impairment provisions of US$ 28 billion in relation to the prospect of Covid-19 related defaults on customer loans. The end result sees Citigroup’s Q2 profit plunging 78%, JP Morgan Chase down 50% and Wells Fargo posting its first quarterly loss since the 2009 GFC. Citigroup has set aside a 3.9% provision on its loan book (from 1.9% last year), as it posted a US$ 1.3 billion profit figure on a 5% increase in revenue to US$ 19.8 billion. JP Morgan, which has set aside US$ 10.0 billion for losses, including nearly US$ 9 billion to build its reserves, reported profits of US$ 4.7 billion on the back of a 15% increase in quarterly revenue to US$ 33.0 billion. Having set aside US$ 9.5 billion to cover potential coronavirus-related losses, including US$ 8.4 billion in reserves, Wells Fargo posted a US$ 2.4 billion loss, (compared to a US$ 2.4 billion profit in Q2 2019).

Latest estimates from Lloyds point to a current US$ 5.0 billion pay-out in claims relating to the pandemic, noting that H1 had been “exceptionally challenging for our people, our customers, and for economies around the world”.  Lloyd’s of London, whose results are an aggregate of some ninety syndicate members, expects to settle claims in the region of US$ 2.4 billion in H1. With on-going court cases, their H1 loss of US$ 525 million, (compared to a US$ 3.1 billion profit in the corresponding 2019 period), may well be replicated in H2, with pandemic-related losses stretching well into the future.

A study of the companies trading on the ASX 300 noted that twenty-five companies managed to pay a total of US$ 18 million in executive bonuses, whilst still claiming JobKeeper subsidies. The Business Council of Australia criticised their actions saying companies should not be paying bonuses if they are receiving JobKeeper. It included Star Entertainment Group, which operates Star Casino, which actually received the most in JobKeeper subsidies – US$ 46 million – whilst paying its chief executive, Matt Bekier, a US$ 600k bonus. Footwear company Accent Group — which distributes brands Dr Martens, Athlete’s Foot, Vans, Saucony and Skechers — paid its chief executive Daniel Agostinelli a US$ 860 million bonus, having received over US$ 15 million in wage subsidies, as well as nearly US$ 6 million in rent waivers.

It seems that Amazon has taken time out to work out that it paid US$ 400 million in UK taxes in 2019, (including business rates, corporation tax, stamp duty and other contributions) and has again stressed that it pays “all taxes required in the UK”. The tech giant, which employs 33k, posted a 26% hike in revenue to US$ 376 billion, resulting in a US$ 15.5 billion profit. Little wonder then that Amazon, and its fellow cohorts, are being chased by governments worldwide concerned with the relatively low amounts of money they add to different countries’ exchequers. The UK Chancellor has said that the massive US tech firms need “to pay their fair share of tax” and launched a 2% tax on digital sales to make up for losses incurred when conglomerates re-route their profits through low tax jurisdictions; Rishi Sunak also added that the coronavirus crisis had made tech giants even “more powerful and more profitable”.

Apple has refuted claims, made by Epic Games, that the 30% commission it charges all its users was anti-competitive and monopolistic, pointing the finger at the maker of the Fortnite game being “self-righteous” and “self-interested”. It also accused the game maker of violating its contract – and asked for damages in a lawsuit initiated by Epic last month – following its offering a discount on its virtual currency for purchases made outside of the app, from which Apple receives a 30% cut. This led to the tech giant banning updates that are required to continue progress with the game. Epic has refused to accept Apple’s offer to allow it to use the app on condition it deleted the direct payment feature, (so as comply with its terms and conditions of use) because it would be “to collude with Apple to maintain their monopoly over in-app payments on iOS.” There is no doubt that Epic is not the only problem facing Apple as global scrutiny on the modus operandi of its App Store is gaining traction; legislators in Washington and Brussels are becoming increasingly concerned that competition rules are being stretched and violated.

UK regulators are closely looking at whether fraud, or payment in error, has taken place in relation to the government’s furlough scheme that has cost US$ 48 billion to date, with estimates that up to 10% of that total could have been paid by mistake. The scheme paid laid-off workers a maximum US$ 3.4k a month from government funds.  HMRC is now looking into 27k “high risk” cases where they believe a serious error has been made in the amount employers have claimed. The losses attributable to the furlough scheme are just a portion of the almost US$ 40 billion lost in 2019 due to taxpayer error and fraud.

After weeks of negotiations, the EPL has walked away from a US$ 700 million contract with Chinese digital broadcaster PPTV, who wanted to pay less following the football blackout during lockdown. The UK “suits” refused to back down, despite agreeing to U$ 440 million worth of rebates with other broadcasters over the three-month enforced break. It seems quite understandable that the Chinese company should not continue to pay the full value of the broadcast deal at the “same price and conditions as pre-Covid”. The EPL lost over US$ 1.1 billion last season, attributable to lost match day income with games being played in empty stadia. Pre-Covid, the EPL was forecasting a net US$ 5.7 billion from the sale of international rights for the next three seasons but that now seems a distant hope.

As an indicator that the US economy is on the move, the August unemployment rate fell again for the fourth straight month from its April 14.7% high to under 10% last month, with firms adding 1.4 million new jobs. There are fears that this recovery is unsustainable, with the pace of job growth slowing, so that it would take a further nine months for the twelve million displaced since February 2020 to return to work. The other factor is that the ‘under-employment’ rate is still over 14%, and this may be even slower to fall; the 2008 GFC showed that rapid job losses did not equate to sharp recoveries.

President Emmanuel Macron has unveiled a US$ 120 billion stimulus package – dubbed “France Relaunch” – as the country tries to get to grips with the impact of Covid-19. The aim of the package is to reverse rising unemployment, (by creating 160k new jobs), and counter the massive 13.8% contraction in the Q2 economy and will include major spending on green energy, long-term investments in employment and transport. The plan, equivalent to 4% of the country’s GDP, will be four times more than the 2008 package following the GFC. Not surprisingly, about US$ 47 billion will come from the new European Union Recovery Fund. Whether this boost will be enough to help the French economy escape one of Europe’s worst recessions, with an 11% drop in economic output forecast for 2020, remains to be seen.

The knives were already out and sharpened prior to the announcement that London-born and Rhode scholar, Tony Abbott, former Australian prime minister, had taken up an unpaid position as an adviser to Britain’s Board of Trade. The role involves promoting UK trade interests to other countries and help with setting up trade treaties with various countries, when the UK finally exit the EU without a deal at the end of the year. He has had experience with the likes of China, Japan and South Korea, overseeing free trade agreements with such countries when he was Australia’s prime minister. His current remit involves providing “a range of views to help in its advisory function, promoting free and fair trade and advising on UK trade policy to the International Trade Secretary”. There are many, including Nicola Sturgeon and Keir Starmer, who are against the appointment on the grounds that he is a misogynist, a sexist and a climate change denier.

The week ended with the eighth round of Brexit talks in London having made little or no progress. In typical Johnsonesque brinkmanship, the UK prime minister has rattled EU negotiators, headed by the urbane Michel Barnier. The UK announced that it would be prepared to override the Brexit treaty by using parliament to set aside parts of the protocol on N Ireland enshrined in the withdrawal agreement; this had solved the problem of a hard trade border on the whole of Ireland by ensuring the Six Counties being both close to EU customs union and at the same time being  in the UK’s customs territory. Ironically, the EU, expressing deep concerns about this protocol violation, threatened legal action and said that the move had “seriously damaged trust between the EU and UK”. It is very difficult to put the ‘EU’ and ‘trust’ in the same sentence.

The ECB is becoming increasingly concerned about the implications of a strong euro which has risen to US$ 1.20 due to a myriad of reasons including the knock-on effect of last month’s massive EU pandemic recovery fund and last week’s US Fed’s discretionary inflation-targeting stance. According to its president, Christine Lagarde, the situation is being closely monitored because of the negative pressure on prices; she also confirmed the bank will use its stimulus package in full to help pull the bloc out of recession. There is every possibility that rates may have to be cut further into negative territory as the ECB seems “determined to use all policy tools it has available”. The bank also expects that inflation, which turned negative in August, will continue below zero until later in the year but the average 2020 rate will be 0.3%; however, it has forecast that 2021’s rate will be a highly unlikely 1.0%. The ECB will have to introduce more stimulus measures mainly because of the record Q2 12% output contraction.

These are tough times for the EU having to fight fires on three fronts – an upcoming currency war with the US, finally realising that their previous bullying tactics no longer work in Brexit negotiations and the bloc’s post-pandemic economy is not bouncing back as quickly as first forecast. Time to Get The Fire Brigade!