Lucy In The Sky With Diamonds!                                                             05 November 2020

Property Finder reports that, quarter on quarter, the value of Q3 property transactions leapt 65% to US$ 4.9 billion, and deals by 55% to 8.7k, indicating that an economic recovery, however slight, is under way; over the first nine months of 2020, there were 24.5k deals, valued at US$ 13.8 billion. The month of September saw monthly rises of 53.3% in the volume of sales to 3.9k and 39.1% in value to over US$ 2.4 billion; of the monthly sales, 46% were off-plan, (up 155.7%) and 54% in the secondary market, 74.2% higher.

For the week ending 05 November, there were over 1.2k Dubai real estate transactions, valued at US$ 790 million. During the week, 854 villas/apartments were sold for US$ 406 million, along with 44 plots for US$ 48 million. The three best-selling properties were an apartment in Marsa Dubai for US$ 70 million, US$ 28 million for a Burj Khalifa apartment and a villa in Al Hebiah Fourth, (US$ 26 million). The week saw mortgaged properties totalling US$ 27 million, with the highest being for land in Nadd Hessa, mortgaged for US$ 54 million. The three locations with high unit sales were Jabal Ali First – 16 units for over US$ 7 million –Nad Al Shiba Third, (5 for US$ 3 million) and Al Merkadh (5 for US$ 17 million).

With the triple aims of improving communication, reducing complaints and boosting transactions, the DLD has initiated the Green List project on its real estate app Dubai Rest. The app will provide “a flexible and transparent communication channel to enhance relations” between real estate owners and brokers. In future, most real estate transaction decisions will take place through an integrated set of digital procedures, with property owners being required to register to be able to communicate with brokers. The initiative is part of Rera’s goals to establish a professional real estate sector and create a highly advanced real estate regulatory platform.

HH Sheikh Mohammed bin Rashid approved the US$ 15.8 billion budget for 2021, (slightly lower than last year’s US$ 16.7 billion record one), following Sunday’s federal Cabinet meeting. In his usual confident and upbeat manner, Sheikh Mohammed commented that “the UAE economy will be among the fastest to recover in 2021, and the government has dealt with the 2020 budget efficiently and has all the tools to continue its financial and operational efficiency in 2021”. Of the total, US$ 11.1 billion will be spent on three sectors – social development/benefits (US$ 7.1 billion), education (US$ 2.6 billion) and healthcare (US$ 1.4 billion). Infrastructure and specific federal projects will see spends of US$ 1.3 billion and US$ 1.1 billion. This year will see the budget fight the double whammy negative impacts of Covid-19 and lower energy prices. In a July restructuring move, it was decided to integrate four separate federal assets – the Federal Water and Electricity Authority, Emirates Post, Emirates Transport and Emirates Real Estate Corporation – into the Emirates Investment Authority. The Cabinet reviewed its performance since then, with Sheikh Mohammed noting “the agency includes all the investment assets of the federal government and is considered an arm to consolidate the strength of our national economy.”

Emirates has announced that it is implementing several initiatives such as unpaid leave and flexible work-time models so as to help cope with the repercussions from Coviod-19 that has seen air travel bludgeoned, with many scheduled flights still cancelled because of international travel restrictions. This includes offering some of its flight crew unpaid leave for up to twelve months, with the possibility of an early recall if and when circumstances change for the better. It is reported that accommodation, medical cover and other allowances will be paid during their enforced absence. To date, the carrier’s passenger network has managed to expand to ninety-five destinations, with hopes that it will be able to serve all of its former network to 143 cities by mid-2021.

The Central Bank has reported that its Targeted Economic Support Scheme has directly impacted 321k, comprising 310k distressed residents, 1.5k companies and 1k SMEs. Launched at the start of the pandemic in March, the US$ 27.2 billion stimulus package comprised US$ 13.6 billion of zero-interest, collateralised loans for UAE-based banks and the same amount freed up from banks’ capital buffers. A total of US$ 12.2 billion, 90% of the liquidity facility provided by the central bank, had been drawn down by UAE lenders until the end of July.

Forecasts  indicate that UAE online  retail sales will top US$ 1.5  billion in Q4, as more shoppers desert bricks and mortar for clicks; this would be almost 50% higher than the same period in 2019, and 15.4% up quarter on quarter, driven to a large extent by the growth in grocery sales; this represents a massive 260% annual increase to US$ 300 million and a quadrupling of e-orders from 20k a day to 85k. Groceries are expected to account for 33% of online sales by the end of the year. Although electronics still has 40% of the overall online retail segment, with sales of US$ 177 million, it will be the slowest growing category in online retail sales in Q4.

DFM-listed Aramex posted a 59% slump in Q3 profit to US$ 13 million, driven mainly by losses to property in Lebanon and Morocco, as revenue came in 19% higher at US$ 408 million; losses of   US$ 14 million were attributable to the August Beirut Port blast in Lebanon and a warehouse fire in Morocco. The region’s biggest courier company, noting that “Covid-19 has accelerated growth in the e-commerce industry, which remains the dominant driver of our top-line growth,” expects strong future demand for its express business, which had already risen by 29% to US$ 192 million in Q3; domestic express business was 29% higher at US$ 95 million, driven by strong e-commerce demand especially in Saudi Arabia and the UAE. In September, ADQ, one of the region’s largest holding companies, acquired 22.25% of Aramex.

Dubai Aerospace Enterprise posted a 42.4% decline in profit to US$ 167 million for the first nine months of the year, as revenue dipped 10.0% to US$ 268 million. YTD, ME’s biggest plane lessor signed agreements to acquire thirty-one aircraft, valued at US$ 1.1 billion, of which US$ 200 million was booked in Q3, with the remainder being booked in the Q4 and early 2021. The aviation industry has been badly mauled by the pandemic and will continue to be economically scarred for the foreseeable future. With the second wave already moving into top gear, cash strapped airlines will face even deeper financial crunches, as passenger demand remains weak and planes continue to be grounded. DAE has indicated that it is working with its customers and has provided relief packages to twenty-one companies, worth US$ 155 million. Furthermore, it has entered into several lease amendments, offering relief totalling US$ 84 million to twelve customers involving near-term relief in exchange for lease extensions. Despite all the turmoil, the Dubai-based company, wholly owned by Investment Corporation of Dubai, achieved 98.3% fleet utilisation at the end of September and ended the period with available liquidity of US$ 2.1 billion, after it repaid a US$ 430 million bond in August.

With no financial details available, it is reported that Dubai-based Khansaheb Investments  has agreed to buy back stakes in three companies – contractor Khansaheb Civil Engineering (45%), oil & gas specialist Khansaheb Hussein (49%) and facilities management company Khansaheb Group (49%) – that were previously held in a JV with UK-based Interserve; this ensures that one of Dubai’s oldest contracting businesses, founded in 1935, is now “the primary owner of all its group companies”. The UK company was placed into administration in March 2019, with liabilities of US$ 1.6 billion, which was then subsequently bought back by a new entity, Interserve Group. Two other examples of Dubai entities buying back stakes in JVs, so as to regain 100% control, are Al Futtaim Construction’s 2018 JV deal with UK-based Carillion and Dutco Group repurchasing from Dutco Balfour Beatty’s two JVs, DBB Contracting and BK Gulf, for US$ 14.3 billion in 2017.

The latest UAE PMI confirms that, in October, business conditions in the country’s non-oil private sector economy deteriorated, indicating a further stalling in the economic recovery; the headline seasonally adjusted index declined 1.5 on the month to 49.5 – with 50 being the threshold between expansion and contraction. A slower rise in output and a sharp reduction in backlog volumes were put down to new business declining for the first time since May. Sales volumes were lower, driven by increased competition and a slow improvement in market activity, with export activity remaining tepid. There was no surprise, given the current economic climate, to see payroll numbers continue to head south, as business expectations sank to a record low, with many still worried about the ongoing impact of the pandemic. Furthermore, some businesses are concerned that costs will outstrip revenue streams, obviously impacting on liquidity, and this has led to marked declines in inventory levels and pressure on margins as selling prices continue to be marked down in order to drum up sales.

Wednesday saw the latest bond listing on Nasdaq Dubai – Commercial Bank of Dubai’s US$ 600 million AT1 6% conventional bond. It was 2.1 times over-subscribed which indicates investors’ confidence not only in CBD itself but also in the Dubai economy. 85% of the issuance was allocated to ME (61%) and European (24%) investors, with the issuance enabling the bank to further support local UAE businesses. The value of new debt listings on the bourse YTD has risen to US$ 17.15 billion – 9% higher from the US$ 15.85 billion over the same period last year.

With its most recent listing – a five-year, US$ 600 million sukuk issued by the Islamic Corporation for the Development of the Private Sector – the total value of sukuk listed on the Dubai Nasdaq has topped US$ 74.0 billion; the ICD is the private sector arm of the Islamic Development Bank (IsDB). The listing, at 140 basis points over the mid-swaps, was three times oversubscribed, with the capital raised being used for development activities in its fifty-five member countries.

There are reports that Emirates NBD is in discussions with Lebanon’s Blom Bank for potential acquisition of its Egyptian subsidiary; although due diligence is still being carried out, there is no certainty that any deal will materialise. Last week, Dubai’s largest bank by assets announced a 68.8% slump in Q3 profit to US$ 425 million, not helped by a jump in impairment charges due to the Covid-19 crisis.

One company that did post positive Q3 figures was Dubai Investments with a 102.9% surge in net profit to US$ 58 million, although nine-month YTD profit was 8.7% lower at US$ 114 million on total revenue of US$ 518 million. Total assets increased 4.4% to US$ 5.9 billion by 30 September 2020. DI is set to launch REIT by Al Mal Capital that is expected to be listed on the DFM in January.

The bourse opened on Sunday 01 November and, 78 points (3.4%) lower the previous four weeks, shed 28 points to close on 2,160 by Thursday 05 November. Emaar Properties, US$ 0.02 higher on the previous week, traded US$ 0.02 higher at US$ 0.73, whilst Arabtec is now in the throes of liquidation, with its last trading, late in September, at US$ 0.14. Thursday 05 November saw the market trading at 181 million shares, worth US$ 43 million, (compared to 181 million shares, at a value of US$ 43 million, on 28 October).

By Thursday, 05 November, Brent, US$ 5.13 lower the previous three weeks had a terrible week slumping US$ 2.15 (5.1%) to US$ 40.31. Gold, US$ 39 (0.2%) lower the previous three weeks, had a better time, mainly thanks to the presidential election, up US$ 68 (3.6%) to close on US$ 1,943, by Thursday 05 November.

Brent started the year on US$ 66.67 and has lost US$ 24.01 (36.0%) YTD but shed a further US$ 2.62 (5.8%) during the month of October to close on US$ 42.66. Meanwhile, the yellow metal gained US$ 380 (20.0%) YTD, having started the year on US$ 1,517 to close at the end of October on US$ 1,897, with October prices down US$ 81 (4.1%) from its month opening of US$ 1,978.

It seems that Chinese authorities may not be so happy with Jack Ma as they cite “major issues” for abruptly halting the stock market debut of his tech giant Ant Group, which should have been selling US$ 34.4 billion worth of shares today – the twin listing in Shanghai and Hong Kong would have been the world’s biggest ever stock market debut. Ant runs Alipay, China’s main online payment system, where the total annual volume of payments on its platforms was US$ 17.6 trillion. The Shanghai Stock Exchange indicated that the Any founder had been called in for “supervisory interviews”, noting that here had been “other major issues”, including changes in “the financial technology regulatory environment” and that the company no longer met “listing conditions or information disclosure requirements”. Maybe the Chinese authorities are concerned that Mr Ma will be able to collect more personal data on the population than they can and that they are losing control of their number one tech giant.

In the six months to 26 September, Marks & Spencer posted a 15.8% decline in revenue to US$ 5.3 billion and sank to its first loss in its ninety-four years as a publicly-listed company, with a deficit of US$ 114 million following a US$ 206 million profit in the same period last year. The main driver behind the disappointing figures was lower clothing and home sales, with clothing sales in city stores over the last quarter tanking 53%; more formal works clothes and occasion-wear bore the brunt of the fall. To further save costs, the retailer cut 7k jobs last August. Online sales were the strongest they have ever been but were still some way off to cover the loss of retail turnover arising from the closure of its six hundred stores during lockdown. Since the start of September, its partnership with Ocado Retail to deliver food has reported a 47.9% hike in sales and rising margins. Until then M&S was one of the few big food retailers without their own internal delivery service.

Ryanair has announced that it would be working to 40% of its capacity this winter but this could drop depending on government restrictions across Europe. Its 2020 forecast, prior to the arrival of the pandemic, was for 150 million passengers, (149 million in 2019), but now it expects to move only 38 million next summer. The airline expects to report a higher H2 loss, to 31 March 2021, compared to H1, but were reluctant to forecast the possible figure. At the end of September, the company had a cash balance of US$ 5.3 billion and is confident that the airline will be able to come through “this unprecedented crisis”. Prior to this year, the airline had only ever posted one annual loss in its thirty-year history.

Dunkin’ and Baskin-Robbins is to be acquired for US$ 11.3 billion by Inspire Bands,  a private equity-backed company in one of the largest-ever transactions in a restaurant industry; The firm, which already owns Arby’s and Buffalo Wild Wings, will take the Dunkin’ Brands Group private at a 23% premium on its 23 October price. Inspire seems to be going against the Covid-19 market trend with its share value already 32% up YTD – and its results heading north, whilst many of its rivals struggle. Inspire, still only two years old, is backed by private equity firm Roark Capital. Its strategy has been to build a collection of restaurant brands serving customers across different markets and has seen it since then buy Sonic and Jimmy John’s.  The latest acquisition increases Inspire’s property portfolio by 12.5k Dunkin’ and 8.0k Baskin-Robbins outlets.

It has been reported in the Oman press that the finance ministry is looking at the introduction of income tax on high earners in 2022 in an effort to reduce its fiscal deficit. It seems that mention of the tax was included in a bond prospectus published by the Ministry of Finance when the Sultanate raised US$ 2.0 billion. This comes at the same time that a Royal Decree announced that VAT would be introduced on 01 April 2021, with Oman becoming the fourth GCC state to introduce the tax after the UAE, Saudi Arabia and Bahrain. Compared to its neighbours, Oman, with the highest breakeven oil price of GCC nations, has the most acute fiscal deficit so it is no surprise to see news of a possible new tax being introduced. The IMF estimates that its economy will contract 10.0% this year, with a 2020 budget deficit forecast of 18.3%, slightly improving to 16.3% next year.

Dominic Chappel, the former owner of troubled BHS, which he acquired from Phillip Green, before seeing the chain collapse in 2015, with the loss of 11k jobs and a pension deficit of US$ 760 million, has been sentenced to six years in jail for tax evasion. He was found guilty of failing to pay tax of over US$ 780k  on the US$ 3 million of income he received after buying the failed chain for US$ 4 (GBP 1). It was alleged that he spent the money on two yachts, a Bentley and a holiday to the Bahamas. Earlier in the year he was ordered to pay US$ 13 million into BHS pension schemes after losing an appeal.

One sector that can thank Covid-19 is gaming, with the pandemic driving a boom in video games because movement restrictions and lockdowns in many countries have left many looking for indoor entertainment, with global industry sales topping US$ 10 billion in March alone and growing every month since then.  One of many companies riding the crest of this wave is Nintendo, as sales of its Switch console, (with 12.5 million units), has helped it to a 259% leap in profits for the last half year ending 30 September to US$ 3.0 billion. Software revenue also jumped with its leader, Animal Crossing: New Horizons, selling 14.3 million. Rival Sony said last week that pre-release demand for its Playstation 5 was higher than expected.

Tuesday saw the 160^th running of the Melbourne Cup and punters were not the only ones placing bets on the day. The Reserve Bank also took a gamble cutting interest rates to a record low of 0.1%, with its governor confirming that Australia was not out of recession; it is expected that this rate will stay in place until at least 2024 and it is unlikely to drop below zero because that would not help stimulate spending. It was also confirmed that the RBA will revert to QE and will purchase a further US$ 70 billion government bonds over the next six months to lift inflation and encourage lending and investment. Its governor reiterated that the bonds – to be bought by the central bank on the secondary market and split 80:20, between the federal government and state government – will have to be repaid at maturity. The central bank has also bought US$ 42 billion of three-year government bonds since March. The bank’s main target seems to be to address the high rate of unemployment, expected to peak next year at 8%. The double whammy of bond purchases and lower interest rates will result in reducing financing costs for borrowers, contributing to a lower dollar and supporting asset prices and balance sheets. However, this comes with a caveat – any recovery is dependent on successful containment of the virus. The forecast for inflation over the next two years comes in at 1.0% and 1.5% and whilst that level remains below 3%, cash rates are expected to stay pegged at 0.1%.  With the fiscal year ending 30 June 2021, GDP growth is expected to be at 6.0% and at 4.0% a year later.

To try to reduce the negative impact of the latest second wave of coronavirus infections, the ECB has indicated it will soon increase their purchase programmes and provide more stimulus to an already battered continental economy that will inevitably face a double dip recession. ECB President Christine Lagarde reiterated that “we agreed, all of us, that it was necessary to take action and therefore to recalibrate our instruments at our next Governing Council meeting.” It is likely that the bank will use a lot of weapons in its fiscal armoury including the expansion of the Pandemic Emergency Purchase Programme (PEPP), an extension of the terms of the ECB’s cheap Targeted Longer-Term Refinancing Operations (TLTRO) loans, or even a deposit rate cut.

It is not a good portend to see September Eurozone retail sales plunge – even before the latest Covid lockdowns had been announced that has resulted in non-essential retailers in several member states being forced to close stores. Although still 2.2% higher year on year, they were down on the month by 2.0% – a surprise to the market which had expected a better result. The nineteen countries in the bloc had seen a 4.2% hike in August but these latest figures indicated that the sector was moving southwards, even before the latest lockdowns had happened. Belgium and France witnessed monthly falls of 7.4% and 4.5% respectively, whilst clothing/footwear was the main contributor to the decline, down 7.4%. Non-essential retailers have been forced to close their stores in several countries, including France, Germany and parts of Italy so that will inevitably point to a marked decline in Q4 household consumption, although on-line sale figures will head higher. However, it seems likely that the bigger 28-nation EU will witness a higher Q4 3.0% quarter on quarter contraction with the euro-area economy growing at a lower 4.2% in 2021.

Having earlier forecast a V-shaped recovery for the UK and the Eurozone, Morgan Stanley is betting on a W-shaped or double-dip recovery; their change of heart has been brought about by economies again contracting sharply in Q4, as several European nations enter a second lockdown with the resultant economic slowdown. The US investment bank, expecting the second contraction not to be as severe as the one that started last March, considers that there will be a sharp bounce back, once restrictions are lifted if global governments and central banks give the required fiscal and monetary support. In the UK, a one-month lockdown, starting this week, will hurt some sectors more than others, whilst others may be impacted by the looming Brexit. However, it should not be as severe this time because schools and universities are remaining open, construction and manufacturing work will be allowed to continue, and the furlough scheme has been extended.

To the relief of many UK households, the Johnson administration has extended the mortgage payment holidays for homeowners financially affected by the pandemic for another six months as the initial programme came to a halt on Saturday, 31 October. Borrowers, who have not yet had a mortgage holiday, can request a pause in repayments, that can last up to six months, or those who have had their payments already deferred, can extend their mortgage holiday until they reach the six-month limit. Some 2.5 million people have taken a payment break on their mortgage since the start of the then six-month scheme in May. Last week, a study by the Joseph Rowntree Foundation found that 1.6 million households – or a fifth of all British mortgage-holders – were worried about paying their mortgage over the next three months. Borrowers who have already reached the maximum six-month mortgage holiday, and are still facing difficulty making repayments, are being advised by the FCA to speak to their lender about a tailored support plan.

This is but one financial support measure to try and help the economy from the negative impact of a second lockdown which came into force today, aptly on Guy Fawkes Day.  Another sees the reintroduction of the furlough scheme which will pay out 80% of a person’s pay. However, no mention has been made about those who are self-employed, with pressure groups calling for previously announced winter support grants to be increased from covering 40% of profits to something similar to the support on offer for employees. The Treasury later announced that there would be monthly grants, linked to the rateable value of properties, of between US$ 1.8k and US$ 3.9k.

The news of a further lockdown could not have come at a worse time for many especially those involved in sectors such as the hospitality, aviation and travel along with retailers, who have been stocking up for a now hope-dashed Christmas rush. Also, it will be a torrid time for those households who have taken on extra debt and have seen the depletion of their assets since the onset of the pandemic in March. The Financial Conduct Authority is said to be considering a possible payments holiday for people struggling to pay off debts such as credit cards and personal loans, on the same lines as that offered to mortgagees.

According to analysis from the EY Item Club, in the first eight months of the year, business borrowing from UK banks quintupled, compared to the same period in 2019, climbing to US$ 57.5 billion. The main driver was government-backed loans but firms shoring up their dwindling cash reserves also contributed. By the end of the year, the figure – which excludes lending to other lenders and financial companies but includes repayments – is expected to have risen 11% to US$ 657 billion. It is forecast that many borrowers will not start to repay debt, and reduce their borrowing, until 2022 at the earliest. The contrast to an increase in business lending to business is a dip in consumer borrowing which is expected to decline by 6% – its biggest fall since 2011. The forecast is that consumer credit write-off rates will almost double from 1.3% in 2020 to 2.5% next year.

By Thursday, the Bank of England injected a further US$ 195 billion of stimulus into the UK economy on Thursday and at the same time noting that the recovery from the second wave will be a a slower and bumpier one than that of the first. This was the BoE’s fourth QE measure, since the onset of Covid-19 in March, and takes the nine-month total to US$ 1,300 billion; at the same time, it maintained its benchmark interest rate at a record low of 0.1% – a figure that will not go any higher (and may even move into negative territory) for some time. It is expected that the Monetary Policy Committee will look at further stimulus packages in 2021, whilst the corporate bond-buying target stayed at US$ 27 billion. The BoE also downgraded its growth forecast and now expects that the economy will return to its pre-pandemic levels in early 2022, whilst it cut its Q3 growth forecast by 2.2% to 16.2% and a 2% contraction in Q4, with a 11% fall in GDP for the whole year The central bank has also to deal with the impact of Brexit – and along with the pandemic – their effect on consumer confidence and weaker spending. Both will have to show marked improvements for the UK economy to start expanding again. Any improvement will also help with the unemployment problem, which stood at a relatively high 4.5% in August but is expected to move upwards to a worrying 7.7% by Q2 2021.

With the mine owners, Rio Tinto having decided close its Argyle diamond mine in Western Australia and to mothball the operation before returning the land to its Traditional Owners, there has been a surge in interest and a buy-up from wealthy collectors and investors around the world. Since its opening in 1983, the mine has produced more than 865 million carats of rough diamonds, becoming the world’s largest producer of coloured diamonds and virtually the sole source of a very small but consistent source of rare pink diamonds. Apart from the obvious colour difference, the value of pink diamonds is determined by the vibrancy of their bubble-gum hue, whilst that of the white diamond is graded based on their size, cut and clarity. It is estimated that an investment-worthy stone could start at US$ 14k and could attract up to US$ 2.1 million for a single carat. Later in the year will see the penultimate one of Argyle’s annual tenders – an event for just a handful of global jewellers to bid on stones in a blind auction.

After five years, the founder of green energy firm Ecotricity, Dale Vince, has developed a process that utilises a sky-mining facility, using wind and sun to provide the energy, to pull carbon out of the air to produce diamonds that are physically and chemically identical to those that have been mined in the traditional manner. The Gloucestershire-based company claims it is a unique way to process the “Sky Diamond” that challenges ‘normal’ mining techniques, which cause damage to the planet, whilst their diamonds are negative carbon because their diamond product is a form of atmospheric carbon. Production time is around two weeks and each diamond is certified by the International Gemological Institute. This 21^st century technology could well serve as a disruptor to the diamond world and will do its bit to fight the climate and other sustainability crises. The Beatles were ahead of their time with Lucy In The Sky With Diamonds!