Make Hay While The Sun Shines! 09 September 2021
For the past week, ending 09 September, Dubai Land Department recorded a total of 1,944 real estate and properties transactions, with a gross value of US$ 1.96 billion. It confirmed that 1,371 villas/apartments were sold for US$ 744 million, and 111 plots for US$ 152 million over the week. The top two land transactions were both in Island 2 for US$ 16 million and US$ 14 million. The top three transfers for apartments and villas were all apartments in Business Bay, Marsa Dubai and Burj Khalifa selling for US$ 108 million, US$ 54 million and US$ 50 million respectively. The most popular locations were in Al Hebiah Third, with 28 sales transactions worth US$ 19 million, Al Yufrah 3, with 22 sales at US$ 6 million, and Saih Shuaib 1, with 8 sales transactions worth US$ 2 million. Mortgaged properties for the week totalled US$ 817 million, including a plot for US$ 114 million in Al Raffa. 73 properties were granted between first-degree relatives worth US$ 225 million.
It would be no surprise to anyone to read ValuStrat’s comment that the Dubai property sector had staged a strong recovery this year. The consultancy also added, “excluding any unexpected economic or global shock, we expect the current positive trends in the Dubai property market to continue in the short to medium term and to broaden out into some areas currently not seeing an uplift in values”. Many believe that current prices still represent good value and that there is a mid-term undersupply in some in-demand districts and segments, such as villas and prime apartments. Valustrat concluded that, “it can be expected that some of the highest year-on-year percentage gains recently seen will moderate, as buyer price ceilings are neared, and more moderate house price inflation is seen”. Some will be more bullish, more so if the Covid virus were to dissipate.
For only the second time in six years, all 13 villa locations and 21 apartment areas monitored by ValuStrat’s value price index (VPI) have seen their capital values either stabilised or improved in August, compared to a month earlier. There was a mixed annual capital value performance of Dubai’s apartments, which represent 87% of the residential market, split roughly equally with a third growing, a third flat and a third contracting. Latest figures see the top annual performers for VPI apartments being Palm Jumeirah, JBR, Al Furjan and Al Quoz Fourth-Al Khail Heights, with annual capital gains of 6.8%, 6.1%, 4.6% and 4.1%. For villas, the highest annual capital gains were found in Arabian Ranches 22.0%, Jumeirah Islands 20.8%, Dubai Hills Estate 18.5% and The Lakes 18.3%.
The report also noted that the following four developers accounted for 42.3% of sales – Emaar (21.5%), Nakheel (8.6%), Damac (6.1%), and Dubai Properties (6.1%). In relation to off-plan, the top locations in August were in Dubai Harbour (11.8%), Business Bay (9.2%), Jumeirah Village (9.0%) and Sobha Hartland (7.8%). The most transacted ready homes were located in Jumeirah Village, Business Bay, Al Furjan, Dubai Marina, Downtown Dubai and Dubai Hills Estate, with returns of 8.4%, 7.5%, 7.2%, 6.9%, 5.0% and 4.5%.
Property Finder reported that Dubai property sales transactions rose again in August, with 5,780 sales deals valued at US$ 4.08 billion – its highest ever August level since 2009. Of the total transactions, 55% (3,181 units), valued at US$ 2.73 billion, were in the secondary market, with 2,599 deals, valued at US$ 1.35 billion, for off-plan sales. The overall average monthly sales transaction value increased, month on month, 1.57% to US$ 703k. The five most popular locations for villas/townhouses for transactions were Arabian Ranches 3, Dubai Land, Dubai South, Tilal al Ghaf and Damac Hills 2 and for apartments – Business Bay, Jumeirah Village Circle, Dubai Harbour, Mohammed bin Rashid City and Downtown Dubai. In the eight months of 2021, there were 37,537 transactions, worth US$ 24.0 billion – 22.61% higher than the total figure for the whole of 2020. With rising consumer and investor confidence, along with the imminent opening of Expo 2020, the current bullish property run is expected to continue. Covid has been a driver behind property prices being on the rise, as many have upgraded to larger homes, with outdoor amenities, amid a remote working and learning trend.
EFG Hermes has indicated that Emaar’s 2021 property sales could top US$ 5.85 billion this year, driven by a boom in the UAE’s real estate market and a marked economic recovery. It noted that “ED’s business model has proven resilient amidst the challenges posed since the 2009 real estate crash in the emirate.” The local market has seen a revival in its fortunes, with many end users looking to upgrade to bigger properties, initially driven from the need to work and learn from home remotely. EFG Hermes forecast that that property sales in 2022, 2023, and in the next five and twenty-three years would be US$ 5.85 billion, US$ 4.8 billion, US$ 25.9 billion and US$ 115.8 billion respectively. It would appear that sales in Dubai Creek will contribute the most to the total development portfolio, although over the coming five years are more evenly scattered between projects in the company’s portfolio.
In his bid to achieve top levels of service and dedication among public servants, and also to enhance the competitiveness of the UAE at the global level, HH Sheikh Mohammed bin Rashid Al Maktoum directed an evaluation of the government’s digital services earlier in the year. At the time, he confirmed that more than 1.3k services, provided by ministries and federal government agencies, would be evaluated. True to his word, the Dubai Ruler announced that the UAE’s five best and five worst government digital services would be published. Following assessments testing how easy it was for the public to pay fees, the accuracy of procedures and the speed of service, as well as polling 55k citizens for their opinion, HH Sheikh Mohammed announced the findings. The best performing agency was the Ministry of Interior, followed by the Federal Authority for Identity and Citizenship, the Ministry of Foreign Affairs & International Co-operation, the UAE Ministry of Climate Change and Environment, and the Ministry of Community Development. The five agencies at the other end of the scale, in no particular order, were the Ministry of Education, the Federal Tax Authority, the Securities and Commodities Authority, the General Pension and Social Security Authority, and the Ministry of Energy & Infrastructure. The Dubai Ruler indicated that they all need to improve and gave them ninety days to do so.
This week, the country’s leaders announced ‘The Principles of the 50’, as part of the ‘Projects of the 50’ campaign, to chart the strategic roadmap for the UAE’s new era of economic, political and social growth, over the next fifty years. The ten principles will act as guidelines for all UAE’s institutions and, according to HH The Ruler Sheikh Khalifa bin Zayed Al Nahyan, with the target “to provide the best possible life for citizens and residents of the UAE”. Meanwhile, HH Sheikh Mohammed bin Rashid Al Maktoum noted, “The UAE is one destination, one economy, one flag, one leader, and over the next 50 years, everyone will work as one team to achieve our goals.”
The First Principle states the key national focus shall remain the strengthening of the union, its institutions, legislature, capabilities and finances. The development of the urban and rural economies throughout the nation is the fastest and most effective way to consolidate the union of the Emirates. Other Principles include developing the educational system, ensuring that the economy provides a better life for the people of the Union, and working on stable and positive political, economic and social relations with its neighbours. Others cover consolidating the UAE’s global reputation as well as its position as a global hub for talent, companies and investments Another principle, based on openness and tolerance, sees the need to promote peace, openness and humanity, and sees the country’s foreign humanitarian aid available to any country in cases of disasters, emergencies and crises. The Tenth Principle “calls for peace, harmony, negotiations and dialogue to resolve all disputes is the basis of the Emirates’ foreign policy. Striving with regional partners and global friends to establish regional and global peace and stability is a fundamental driver of our foreign policy”.
New legislation sees children, aged between 15 and 18, now able to take up part-time work in the UAE, when the government announced this the first of fifty new projects that will mark the country’s Year of the 50th celebrations. The Ministry of Human Resources and Emiratisation clarified that the employer has to apply for the ‘juvenile work permits’, with the application costing US$ 27 (AED 100); an additional US$ 136 (AED 500) would be paid once approval is given and the visa will be valid for twelve months.
The two leading regional economies both continued to improve in August; having steadily improved over the past twelve months, Saudi Arabia’s IHS Markitt PMI grew at a slower pace, dipping 1.7 to 54., as did that of the UAE which slipped 0.2 to 53.8. The UAE’s figures were the second-fastest improvement in the country’s non-oil private sector for more than two years, with output growth driving the fastest rise in employment since January 2018. Although August’s data for new orders was slightly lower, it did show that business activity grew at the quickest rate since July 2019, driven by an improvement in demand. There is hope that the recent pickup in the economy – allied with the Expo boost – will continue until year end. Despite the global supply chain problems, the data indicates that supply-side conditions are improving, with overall delivery times shortened for the first time since January.
Dubai’s seasonally adjusted August’s IHS Markit PMI nudged 0.1 higher, on the month, to 53.3, as Dubai’s non-oil private sector grew at its quickest rate in almost two years, driven by output growth among travel, tourism and construction. Consequently, Dubai companies, that needed to accommodate greater sales volumes and backlogs of work, have increased their payroll levels at the fastest rate since November 2019, as they need to rebuild staff capacity to pre-pandemic levels, in response to greater sales volumes and backlogs of work. With the economy beginning to move into top gear, both tourist numbers and consumer demand have headed higher. Furthermore, there is every hope that Expo 2020, opening in another three weeks, will be another fillip for Dubai economy which will also benefit from easing Covid-19 restrictions and the ongoing vaccination programme.
Emirates is slowly returning to some form of normalcy reporting nearly 1.2 million passengers, in July and August, compared to 402k in the corresponding two months last year. YTD, it has slowly restored former routes and currently travels to 120 destinations, from almost nil last year; by the end of October, it will have added a further twenty to its schedule. In 2020, it was the world’s largest international carrier, carrying over 15.8 million passengers.
For the fourth consecutive year, Dubai finds itself fifth globally in the International Shipping Centre Development Index, behind Singapore, London, Shanghai and Hong Kong for global freight. According to the ISCD index report for 2021 it ranks above the likes of Rotterdam, Hamburg, Athens / Piraeus, New York / New Jersey and Ningbo / Zhoushan. The index evaluates three primary indicators (port infrastructure, shipping services and general environment) and 16 secondary indicators, along with the competitiveness of attracting maritime businesses and the extent of development in maritime centres around the world, as well as their impact in advancing the growth of the global shipping sector. It also considers government transparency, within each country on the list, while also taking into account the ease of doing business, the performance of logistics services and capabilities of the departments and e-governments of the countries.
DEWA has confirmed that its Seawater Reverse Osmosis (SWRO) desalination plant is 92.4% complete and when completed by year end, it will have a daily production capacity of 40 million imperial gallons of water. Its current SWRO production capacity is at 13% but targeted to reach 42%, totalling 303 MIGD, by 2030. The power utility is hopeful that, by this date, desalinated water will be 100% produced by a clean energy mix that uses both renewable energy and waste heat by 2030. DEWA also announced that its Hatta hydroelectric power station is 29% complete; it will have a production capacity of 250 MW, a storage capacity of 1.5k megawatt-hours, and a life span of up to eighty years.
H1 witnessed a 59% increase (492 companies) in new company registrations to 3.3k at Dubai International Financial Centre. With these figures, DIFC has reached its 2014 target of tripling its size within a decade, three years ahead of schedule. According to Global Financial Centres Index, the DIFC is the biggest financial centre in the MEA and the 19th biggest worldwide. It has also teamed up with the Mena FinTech Association to develop an innovation forum and other initiatives to advance the financial technology sector in the region.
Amazon Web Services has announced that it will launch its cloud infrastructure in the UAE in H1 2022 – a move that will benefit the Dubai corporate sector, by boosting trade and investment, as well as attracting global talent into the country. With Covid boosting the advent of digital transformation, allied with government support and investment, there is no doubt that the country has become a major hub for cloud infrastructure players, such as AWS, Oracle, Microsoft, Alibaba, SAP and Google. According to Cloudwards, the cloud computing market is estimated to expand 224% to US$ 830 billion by 2025 and that 48% of global businesses currently use cloud storage for storing classified and important data – a figure that will surely move higher. Meanwhile, the public cloud services market in the MENA region has more than doubled to US$ 1.9 billion, over the past five years, whilst the GCC public cloud market is expected to grow 246% to top US$ 2.35 billion by 2024.
Attending the 108th meeting of the Arab League’s Economic and Social Council, the federal Minister of Economy, Abdulla bin Touq Al Marri, reiterated the UAE’s keenness, to achieve the development goals of Arab countries, in line with the Council’s recommendations. Last year, trade between Arab countries and the rest of the world amounted to around US$1.27 trillion, with the UAE accounting for 25% of the total. In H1, the non-oil trade between the UAE and Arab countries grew 29% to US$ 52.0 billion. The Minister also detailed UAE’s bid to host the 28th session of the Conference of the Parties (COP 28) to the United Nations Framework Convention on Climate Change (UNFCCC) in Abu Dhabi in 2023.
The Minister also expects the UAE economy to grow 4.0% this year, 1.5% higher than the estimate put forward by the Central Bank last December, and higher than the IMF’s 2.9% forecast last April. Furthermore, the Minister indicated that the UAE will be seeking US$ 124 billion of inward foreign investment by 2030, (from the likes of Russia, Australia, China and the UK), as well as aiming to be among the ten biggest global investment destinations by then. He also confirmed that the country will be strengthening economic partnerships with South Korea, Indonesia, Kenya, Ethiopia, India, Israel and Turkey.
Last week, this blog noted a study by New World Wealth that ranked Dubai as the 29th most popular global city for ultra-wealthy residents. In H1, it is reported that the number of Dubai’s HNWIs increased by 3.8%, (2k), to top 54k. It also splits the group of HNWIs into billionaires, (those with reserves of more than US$ 1 billion) centimillionaires, (those with a net worth of US$ 100 million), multimillionaires, (with a personal fortune of US$ 10 million or more) and millionaires, (with at least US$ 1 million in property, cash, equities and business interest). It estimated that the number of billionaires increased by two to 12, centimillionaires by thirteen to 165 and multimillionaires by fifty to 2,480. The combined private wealth held by all Dubai residents, with at least US$ 1 million in property, cash, equities and business interests, increased by US$ 13 billion, (2.5%), to US$ 530 billion.
Expo 2020 Dubai will host the two-day 7th World Green Economy Summit next month, organised by DEWA and the World Green Economy Organisation (WGEO), in collaboration with the Dubai Supreme Council of Energy and the UN Development Programme. The theme for this year’s gathering is ‘Galvanising Action for a Sustainable Recovery. The summit’s targets are to advance the green economy and to review the latest digital platforms and international best practices in the green economy and sustainable development. It will also address four main pillars -Youth, Innovation & Smart Technologies, Green Policies and Green Finance.
The Central Bank of the UAE confirmed that the gross assets of banks in the country nudged 0.8% higher to US$ 874.4 billion, on the month, to 31 July. Over the month, total bank deposits increased by 0.3%, increasing from US$ 521.8 billion, driven by rises of 0.1% and 2.3%, in resident deposits, (attributable to a 3.5% increase in government deposits), and in non-resident deposits respectively. Money supply aggregates, M1 and M2 both decreased, on the month, by 0.8% to US$ 178.2 billion and 0.7% to US$ 402.7 billion, whilst M3 increased by 0.1% to US$ 483.7 billion. After 1.4% declines in the previous two quarters, gross credit extended by banks in the UAE rose 0.9% in Q2, at US$ 48.2 billion.
ServeU has won a US$ 5 million contract to provide human resources and staffing services at fourteen of the 190 country pavilions and themed exhibitions during Expo 2020 Dubai. The subsidiary of Dubai developer Union Properties has also secured a deal to provide the UK pavilion with manpower at the Expo 2020 site. ServeU is one of three subsidiaries that UP is planning to list on the Dubai Financial Market, as the parent company attempts to boost its revenue and wipe out accumulated losses. As part of the group’s strategy to cut accumulated losses, it had, last year, agreed with Emirates NBD to restructure an outstanding debt of US$ 258 million, as well as agreeing to divest a 40% stake in its Dubai Autodrome subsidiary for US$ 109 million. To an extent, it has succeeded, with a 2020 profit reducing accumulated losses and increasing shareholders’ equity; in Q2, it posted a US$ 7 million profit, with revenue 19% higher at US$ 27 million.
With no financial details available, Trukker has acquired Pakistan’s TruckSher in a push to expand its operations in that country and boost growth. Only last year, Trukker raised US$ 10 million venture debt from Silicon Valley’s Partners for Growth and it could well be a candidate for an IPO on Saudi Arabia’s Tadawul stock exchange in a bid to tap into the region’s growth potential. This is the first acquisition by the Dubai start-up to expand within the land freight sector. Trukker, established in 2016, operates a fleet of more than 35k trucks here in the UAE, Saudi Arabia and Egypt. The Pakistani purchase, only set up earlier in the year, has a presence in Lahore and Karachi.
The Securities & Commodities Authority has approved the merger move initiated last March between Emaar Properties and Emaar Malls. This arrangement reinforces Emaar Properties’ position as Mena’s largest integrated and diversified real estate company and will boost its financial and operational performance through full consolidation of Emaar Malls’ earnings and cash flow generation. Emaar Malls shareholders will receive 0.51 Emaar Properties shares for one Emaar Malls share at a premium of 7.1% to the closing price of Emaar Malls on 01 March 2021, the last trading day prior to the merger announcement and 3.5%on its 01 September price.
The DFM opened on Sunday 05 September, 208 points (7.4%) higher the previous seven weeks, shed 4 points (0.1%) to close the week on 2,908. Emaar Properties, up US$ 0.05 the previous three weeks, lost US$ 0.01 to close on US$ 1.14. Emirates NBD and Damac started the previous week on US$ 3.79 and US$ 0.34 and closed on US$ 3.81 and US$ 0.34. On Thursday, 09 September, 148 million shares changed hands, with a value of US$ 55 million, compared to 149 million shares, with a value of US$ 44 million, on 02 September.
By Thursday, 09 September, Brent, US$ 0.82 (1.2%) lower the previous week, regained US$ 0.90 (1.3%), to close on US$ 71.43. Gold, US$ 61 (2.9%) higher the previous three weeks, shed US$ 16 (0.9%) to close Thursday 09 September on US$ 1,794.
With Iraq in the midst of a severe energy crisis, there was some good news this week with TotalEnergies signing a US$ 27 billion contract to invest in the country’s oil, gas and solar production. No immediate details were available as to the value and duration of this mega agreement, but it seems that the initial investment will be US$ 10 billion, to be spent on infrastructure. The contract covers four projects which aim to:
- pipe seawater from the Gulf to southern Iraqi oilfields, (with the water used to extract oil from subterranean deposits)
- increase production from the Artawi oilfield from 85k bpd to 210k bpd
- construct a complex to exploit production from the sector’s gas fields so that any excess can be utilised for use in electricity generation
- Install a solar farm in Artawi that should produce 1k megawatts of electricity
Because of lack of investment, OPEC’s second biggest oil producer is currently facing an acute energy crisis and chronic blackouts, with the country’s economy tanking as oil revenue accounts for 90% of state revenue. It is reported that 33% of its gas and electricity requirements are being supplied by its neighbour, Iran, to which it owes at least US$ 6 billion for past supplies.
With the financing needs of Gulf sovereign wealth funds being boosted by rising energy prices, and a brighter economic environment, the consequence of which is that sukuk issuances this year will be marginally down, around 5%, on the 2020 return of US$ 205 billion. Driven by continued economic recovery, improved liquidity in debt markets and strong investor demand, H2 issuances may be just shy of the US$ 100 billion mark. It expects that issuances in Malaysia and Indonesia, still reeling from the Covid impact, will be higher, because the need for funding remains high. Moody’s Investors Service noted that H1 sukuk issuance in the GCC fell 19.0% to US$ 35.3 billion, with Saudi Arabia remaining the bloc’s largest issuer accounting for around 62% (or US$ 22 billion) of the total volume – down from US$ 24.5 billion in H1 2020.
A US judge has ruled that Boeing’s board of directors must face a lawsuit from shareholders over two fatal crashes involving its 737 Max plane, indicating that the first crash in December 2018 in Indonesia was a “red flag” about a key safety system on the aircraft “that the board should have heeded but instead ignored”. It also noted that the real victims were the 346 who died, and their families, but investors had also “lost billions of dollars”. The 737 Max was then grounded in March 2019 following the second crash in Ethiopia, with investigations later finding a flaw in an automated flight control system, known as MCAS.
In another blow to Prime Minister Narendra Modi’s hope to bring in foreign manufacturers, Ford has joined General Motors to pull the plug in India and will stop production at plants in Gujarat and Tamil Nadu in Q2 2022. The car giant, which has accumulated losses of US$ 2 million, over the past decade, will continue to make car engines for export. Ford makes five different models in India but is ranked ninth on the list of the country’s biggest car makers, with a paltry 2% of the market.
After acquiring William Hills for US$ 4.0 billion in April, Caesars Entertainment, the owner of Caesars Palace, decided that it only needed the seller’s US operations and that it would auction the non-US side of William Hill’s business, which includes online operations across the UK and Europe. Five months later, 888 Holdings announced that it will take over the business, which includes 1.4k UK betting shops, in a US$ 3.0 billion deal. The new combined group, which will be one of the world’s largest online betting and gaming groups, will have 12k employees and the merger will result in annual savings of US$ 140 million.
In a bid to strengthen its presence in Asia, particularly in Japan, the world’s third biggest e-commerce market, PayPal, is planning to invest US$ 2.7 billion to acquire payments platform and provider of buy now, pay later solutions Paidy. A PayPal spokesman noted that “Paidy pioneered buy now, pay later solutions tailored to the Japanese market and quickly grew to become the leading service provider in Japan”. The Tokyo-based platform has more than six million registered users and enables Japanese shoppers to make online purchases and then pay for them each month in a consolidated bill. Only last month, it was reported that Paidy was planning an IPO, but its immediate remit is to continue to operate existing business, maintain its brand and support a wide variety of consumer wallets and marketplaces. (Although Q2 revenue was 19% higher on an annual basis to US$ 6.24 billion, and a further 11.4 million new active accounts, its net profit dipped 22.4% to US$ 1.2 billion).
Following the demise of some of its U.S. investment funds in 2020, Germany’s biggest financial company is being investigated by Germany’s financial regulator, BaFin. Allianz, which is already facing a slew of investor lawsuits by the US Department of Justice and Securities and Exchange Commission, over its Structured Alpha Funds, has a massive US$ 2.9 trillion in assets under management. These funds, catering to US pension funds for workers such as teachers and subway employees, were also marketed to European investors, and were under the management through bond giant Pimco and Allianz Global Investors. The insurer closed two funds in March 2020, valued at US$ 2.3 billion at December 2019, after the losses from bad bets on options became so extreme, as the onset of Covid sent global markets tanking and funds losing up to 80% in value. The end result is that Allianz is facing twenty-five lawsuits, claiming US$ 6 billion in damages. The investigation is looking at the extent to which Allianz executives, outside the fund division, had knowledge of, or were involved in, events leading up to the funds, racking up billions of dollars of losses.
PAL Holdings, the holding company of Philippine Airlines, has had financial problems for some time and had reported losses for every quarter since 2017; the carrier posted a US$ 1.4 billion loss last year, compared to a US$ 200 million shortfall in 2019. Having cut its work force by 35% earlier in the year, and with a proposed restructuring plan, which needs court approval, Philippine Airlines has filed for Chapter 11 bankruptcy in New York. The eighty-year-old embattled airline aims to slash US$ 2 billion in borrowings – and with a further US$ 505 million in equity and debt financing from its majority shareholder, as well as US$ 150 million of debt financing from new investors, it already has support agreements from 90% of its lenders. Philippine Airlines is the latest international carrier to reorganise in the US, under the US bankruptcy code, following the likes of Chile’s Latam Airlines, Aeromexico and Colombia’s Avianca Holdings, all being badly impacted by Covid.
Having invested US$ 9.4 billion to acquire Asda last year, the Blackburn billionaire brothers, Mohsin and Zuber Issa, announced plans to open nearly 230 convenience stores at UK petrol stations, owned by EG Group, the brothers’ business. After a trial at five petrol stations, 28 ‘Asda on the Move’ shops will open this year, with a further two hundred at petrol forecourts, to launch in 2022, in a belated attempt to catch up with Tesco and Sainsbury’s, which have long operated smaller format shops. Asda indicated that shops would be up to 3k sq ft and stock up to 2.5k products; it would supply goods to EG Group on a wholesale basis.
The UK has a new cheapest supermarket, with Lidl taking over the mantle from fellow German interloper, Aldi. Last month, a basket of 23 essential items bought from Aldi came in US$ 0.60 and US$ 12.50 cheaper than Lidl and Waitrose. Lidl, the world’s fifth largest retailer, has 11.2k global stores of which 762 are in the UK.
The seriousness of the ongoing semi-conductor chip shortage can be seen with news that General Motors has had to halt output at most of its North American plants – four in the US, three in Mexico and one in Canada; it is expected that the closures could be for up to two weeks. The vehicle maker reported that the closures will affect some of its most profitable vehicles, including sport-utility vehicles and midsize pickup trucks. Earlier, both Toyota, (slashing global production by 40% this month), and Ford announced output cuts for this month, as chipmakers struggle to meet the high demand from various industrial sectors. The current problem is down to Covid, as car makers slashed orders at the start of the pandemic, fearing a long downturn in sales. At the time, chipmakers saw a demand surge from tech companies and the consumer electronics sector to take the semiconductors that normally would have gone to the car manufacturers. Now with business conditions improving, carmakers, that had previously cancelled orders last year, find themselves at the bottom of the queue.
There has been another monthly improvement in the OECD’s unemployment rate, declining a further 0.2% in July to 6.2%, which is still 0.9% higher than reported in pre-pandemic February 2020’s returns. The bloc, encompassing eurozone countries as well as the US, Australia, Japan and the UK, saw the number of unemployed workers declining 1.6 million in July to 41.1 million. In the eurozone, the unemployment rate fell 0.2% to 7.6%, with Spain knocking 0.7% off its rate, but it is still at a worryingly high 14.3%. Other major economies – Canada, US, Australia and Korea – all saw 0.3% monthly declines to 7.5%, 5.4%, 4.6% and 3.3%, whilst Mexico and Japan were flat on the month as unemployment levels remained at 4.2% and 2.8%.
Despite the US August unemployment rate dipping 0.2%, on the month, to 5.2%, the US economy only added a disappointing 235k new jobs, compared to the 1.05 million created in July. The number of people unemployed edged down to 8.4 million, remaining well above the pre-pandemic level of 5.7 million seen in February 2020. This could be an indicator that the economic recovery may be running out of steam, but it may only be a blip caused from rising Delta variant infections that have impacted spending on travel, tourism and hospitality. This month’s figures will probably be worse considering the devastating effect of last week’s Storm Ida on the east coast and the Californian wildfires.
August saw the lowest figure for proposed job cuts, at only 12.7k, for seven years, despite the imminent end of the UK’s government’s furlough scheme – a year ago, firms were looking at figures of 150k; it now appears that the predicted surge in unemployment this autumn may be smaller than expected. The furlough scheme ends this month so that by then employers will have to make the decision whether to keep staff and pay all their wages, for the first time since April 2020 or let them go. At the end of June, the number on furlough had dropped to 1.9 million. The latest unemployment rate at 4.8% is 0.9% higher than before the pandemic, but 0.2% lower than the previous quarter. It is expected that the rate will keep heading south because of the high labour demand and fewer people in the labour market due to the crisis and Brexit; there is every chance that staff shortages in certain sectors will continue until the end of 2023.
First it was MacDonald’s milk shakes, KFC chickens, beer, Hardy’s Australian wine, Iceland products and flu vaccines in short supply, and now joined by Ikea, as a combination of a shortage of HGV drivers, (some estimate that the figure could be as high as 100k), Brexit issues and a global supply problem, combine to dry up the supply chain. The Swedish furniture giant is struggling to supply about 1k product lines and reported that all 22 of its UK and Ireland stores were having supply problems, with 10% of its stock. To make matters worse, Ikea cannot serve the higher customer demand – and so are losing revenue – as more people are spending more time at home. For what it is worth, the government noted that it was “working closely with industry to address sector challenges”.
Many Brits put their shortages down to Brexit and do not seem to realise that it is a global problem not getting any better. In Australia, the global supply chain crunch is badly effecting wholesalers and retailers either unable to receive goods on time and, if they can, costs are rising higher. Most of the imports originate in Asia, and specifically China, where one coronavirus case was enough to shut down a critical part of the world’s third-busiest container port, at Ningbo in China, for a fortnight. Currently, outbreaks of the virus have also closed down factories and ports in Vietnam, which is now known as a major global apparel supplier. Another cost problem is that freight rates see Australia also competing against more lucrative markets for products, like the US, where consumer spending is soaring and driving up shipping rates. Australians sometimes forget that the country accounts for only around 0.3% of the global population and so has little or no clout compared to the bigger and more populous nations. Before the pandemic, about 80% of air freight to Australia was carried on passenger flights but because of Covid, this has been drastically cut as there is an almost total travel ban that ensures that citizens can only leave Australia for essential reasons, (that does not include holidays). Other problem areas are port congestion and landside inefficiencies which tie up huge amounts of capacity.
With its property market still firing on all cylinders, Australian lenders have slashed variable mortgage and short-term fixed interest rates to attract new customers, even though the RBA kept rates on hold at 0.1%. Latest data from RateCity notes that over the past two months, the number of variable rates on its database under 2% had risen from 28 to 46; the cheapest rate on offer was at 1.77%, with the average at 2.72%. However, on the flip side, longer term fixed rates are heading in the other direction – at the start of 2021, there were 32 four-year fixed loans, with a less than 2% interest rate, now there are none. The Reserve Bank also extended its monthly US$ 3.0 billion bond buying stimulus program, until at least mid-February, to counteract the negative economic impact from the latest lockdowns in the ACT, New South Wales and Victoria.
As Chinese companies come under increased pressure in the western world, as well as in China itself, it may be more than coincidence that President Xi Jinping has announced that the country will have a third stock exchange in Beijing to serve the country’s SMEs; its two other bourses are located in Shanghai and the southern city of Shenzhen. The China Securities Regulatory Commission confirmed that it would be similar to Shanghai’s STAR market, which is seen as China’s equivalent to the technology-heavy Nasdaq. Already this year, the Chinese regulators have introduced a myriad of tough measures to curb some activities of companies, including tech giants, tutoring firms, TV companies and streaming platforms, both at home and overseas. To make matters worse, the SEC will now require more detailed information on Chinese companies selling shares in the country, whilst back home the government signalled that this crackdown would continue, as it unveiled a five-year plan outlining tighter regulation of much of its economy.
The financial problems of Hong Kong-listed China Evergrande may have a negative impact on Australia’s future economic wellbeing. Although it is China’s biggest property group and the world’s 122nd largest company by sales, it now has the unenviable title of being the most indebted company in the world, owing creditors and other stakeholders a mouth-watering US$ 300 billion. Its fall from grace has been rapid, having been the world’s most valuable real estate group just three years ago. Two years ago, its chief executive, Jiayin Xu, was China’s third-richest person, with an estimated wealth of US$ 30 billion. Even before this week’s announcement, that warned that it may default on debt repayments if its efforts to refinance and sell assets fall short, the company was already talking with creditors and stakeholders trying unsuccessfully to sell their debt by up to 70%. The fear is that in a fire sale, Evergrande may have to sell its vast portfolio of apartments at heavy discounts which in turn could really damage the industry by undermining prices and putting smaller competitors out of business.
In the past, it was felt that the Chinese administration often turned a blind eye to the industry’s excesses, with its principal target being to stimulate economic growth and introduce an unprecedented free market system away from the previous agrarian-based market, at the expense of tougher regulations. Dodgy building standards, sales and loan sharks and a host of other illegal activities have been prevalent in the industry. This laissez faire approach has seen China transform into an urbanised industrial powerhouse, over the past forty years, on a scale and speed never before witnessed in history. The end result has seen millions of farm workers flock to newly built cities, the rise of property moguls, sky high rents, unaffordable housing and younger generations locked out of the market. Last year, Beijing introduced what it called the Three Red Lines Policy for property developers, so as to reduce debt within the industry, curb runaway property prices and lift standards. It is apparent that the housing boom in China is in the throes of an implosion and the knock-on impact in Australia could be grave, bearing in mind that property developers account for 50% of all China’s iron ore demand; Australia supplies 60% of China’s requirements, with the country buying about 70% of the iron ore Australia exports which makes up about 60% of Australia exports. With iron ore prices declining some 40% since May, and the distinct possibility of China cutting its demand forthe metal, the conclusion is that Australian exports and its GDP will take a big hit and could push the lucky country into its second recession in twelve months.
It is interesting to see how much tax the tech giants actually pay and how they can shift profits to low-tax locations. Amazon posted a Covid-driven 50.3% hike in 2020 revenue to US$ 28.4 billion but only managed to pay US$ 678 million in direct taxation; last year the two figures were US$ 18.9 billion and US$ 404 million. The company’s 2020 indirect tax bill came in 24.1% higher, to US$ 1.46 billion, driven by VAT on increased sales and employee taxes, as it took on more people and increased wages. When both direct and indirect taxation were taken into account, its total “tax contribution” was 34.8% higher at US$ 2.13 billion. Amazon reiterated that it was “proud” of its contribution to the UK economy and that it had invested US$ 44.1 billion in UK infrastructure since 2010 and had added 22k to its UK workforce to bring its total payroll to 55k. Amazon – along with its tech giant peers such as Facebook, Google and Apple – pay tax on profits not sales, whilst last April, the UK government launched a 2% tax on digital sales amid concerns that big tech firms were re-routing their profits through low tax jurisdictions. Their reporting is in line with legal requirements, but it does lack crucial information, such as intra-group transactions, so it is impossible to ascertain their actual economic profit. One thing certain is that Amazon’s tax bill is lower than its competitors such as supermarket chains.
Uber Australia’s latest accounts confirm that it has continued its longstanding practice of sending revenue to its head company in the Netherlands, described as a Dutch “cash pooling arrangement”. Some analysts consider this arrangement as a model to minimise tax, but the ridesharing and food delivery says it pays all taxes it owes in each jurisdiction in which it operates. In 2015, the platform acknowledged that 25% of each transaction in Australia was routed to its Dutch parent company in the Netherlands, Uber International Holding BV, which then paid Uber Australia a fee for providing service support in Australia. The 2020 accounts notes that “the Group has a cash pooling arrangement with Uber BV and all cash at bank is transferred to Uber BV at the end of every day,” with US$ 4 million of interest expenses for having this money in the Dutch “cash pool”. The Australian company posted revenue of over US$ 750 million and a US$ 5 million profit as well as noting US$ 474 million of “service fee paid to related companies”, which could be Uber BV or another related offshore entity; it paid US$ 5 million in Corporate Tax. Furthermore, Uber Australia notes a US$ 4.4 billion “collection on behalf by a related company” largely offset by a US$ 3.9 billion “payment on behalf by related companies”. This entity — Uber’s Netherlands-based wholly owned subsidiary called Uber International Holding BV — then paid Uber Australia a fee for providing service support in Australia.
This week, Australia became the world’s biggest gold producer taking the mantle, for the first time, from China which had been the global leader since 2007. Surbiton Associates noted that in H1, Australian producers mined 157 tonnes, four more than China. Over the two previous years, Australia had produced 321 and 328 tonnes, its best ever two years’ results. It does seem, however, that China may soon regain its title once it has sorted out some safety problems in mines, that have resulted in fatalities, which have been closed for further investigations. IBISWorld estimates that the US$ 19.1 billion sector will see an 11.6% revenue hike “due to continued uncertainty about the effects of the Covid-19 pandemic on the global economy”, as well as an anticipated surge in industry output and higher gold prices, currently hovering around the US$ 1.8k level, 25% higher over the past two years.
101 Economics teach that the price of gold, considered a safe haven asset, increases when there is political and economic instability. This is exactly what has happened with the pandemic and global unrest, most notably with the Taliban in Afghanistan, but currently the two biggest factors affecting the gold price is the US Federal Reserve and a weaker US dollar. Although the RBA, (and the ECB), have started cutting back on their QE strategies, the US Fed has yet to move with its tapering of bond buying, which would normally result in less global support for the greenback – and that could see the yellow metal moving higher at least in the short-term which would benefit both gold investors and the Australian economy. The warning to those with investments in gold, (and also cryptocurrencies and global tech shares) is simple – Make Hay While The Sun Shines!