Business Forum • 3 October, 2024 at 11:55 AM
Allianz Trade releases the "Sector Atlas 2024" report, a document that analyzes the major economic sectors, current trends, associated risks and economic developments that will shape the business landscape in the coming year. The report is published at a key moment, when the global economic recovery is still in its early stages and companies continue to navigate a volatile and uncertain environment.
According to the report conducted by Allianz Trade analysts, the global economy reached a trough in the first half of 2024, with the outlook for the end of this year and 2025 indicating a modest rebound. Experts forecast global gross domestic product to grow by +2.8% in both 2024 and 2025. This growth will be mixed, with developed economies such as the US slowing to +1.7%, while the Eurozone will reach +1.4% by 2025. China, on the other hand, will continue to face a gradual slowdown in economic growth, estimated at +4.3% in 2025, as it adjusts to new economic realities.
Despite a mixed set of financial results, which vary significantly by region, most global companies have managed to exceed expectations on profitability. For example, global revenues grew by +3.5% year-on-year, although European companies posted a -0.7% decline. However, 58% of global companies reported earnings above analysts' estimates, giving a positive signal for economic recovery in the coming years. In the US, 69% of companies beat earnings expectations, although economic challenges persisted, with fears of a future downturn in profitability hanging over some key sectors.
The report's sectoral analysis identifies three broad categories of industries facing distinct challenges and opportunities. In the first category are sectors affected by weak demand, such as food, chemicals, retail, textiles and household equipment. These sectors are facing pressure on profit margins amid global challenges such as inflation and high energy costs. The second category includes industries affected by supply chain problems and geopolitical uncertainties, such as transportation, energy and transportation equipment, which, despite steady demand, are facing major operational and geopolitical challenges. In the third category, the report highlights industries with a stable or improving outlook, such as pharmaceuticals, automotive and IT services, which are benefiting from significant technological advances and increased demand driven by structural trends such as the transition to electric cars and demographic change.
While following the global trends, the evolution of the local economy, especially in the segments affected by the fall in export demand (including transportation, textiles, household appliances and furniture), has many particularities.
The energy sector remains affected by geopolitical uncertainties. However, the declines in revenues and profits of the major producers are more likely to be related to the decrease in domestic energy consumption, while the price peaks still in place, imposed by the State, are being maintained. In terms of structure, the influences are quite diverse across the production - distribution - retail chain, with producers remaining by far the most profitable and the most liquid - not surprising given their market position.
"Among the sectors with stable or improving prospects we keep the same nominations locally - pharmaceuticals and IT. However, both sectors are significantly dependent on external factors - either on the liquidity side (through receipts from the National Health Insurance House) or the availability of funds/projects related to the NRRP to compensate for the drop in private sector demand for IT. As for the agri-food sector, stability is evident only for the second component - due to a domestic consumption quite resilient to inflationary pressures in the last two years," says Mihiai Chipirliu CFA - Risk Director, Allianz Trade.
For the agriculture segment, 2023 affected negatively most players, especially in terms of profitability as well as the cash conversion cycle, with large delays in payments to suppliers. While the sector - with 3.5% of total insolvencies at six months to 2024 - is not among the top insolvency generators (with trade, construction, manufacturing, transportation and HoReCa contributing much more, with shares ranging from 28% to 7% each in total), the prolonged drought will most likely keep pressure on the performance of companies in the sector.
Analysts believe that in the absence of a concrete investment plan, coupled with state guarantees/support on the financing side and timely transfer of agreed subsidies, only a state administrative measure or the imposition of any moratorium cannot solve the problems in the agricultural sector. Thus, credit risks for several sectors are generally underestimated in an election year with many pro-cyclical measures - consumption stimulus and lack of measures to adjust public spending - fueling current account and fiscal deficits.
As for the agrifood sector, it remains stable, underpinned by population growth and the continued need for food, despite vulnerabilities from climate change and geopolitical crises. Thus, the global agrifood market has grown significantly from $8.3 trillion in 2021 to an estimated $9.1 trillion by the end of 2024. Allianz Trade analysts expect the agri-food market to reach around $12.5 trillion by 2029, with growth driven by factors such as technological advances and changes in consumer preferences. In 2023, the profitability margin for food-producing firms was around 11%, with the beverage segment continuing to grow in both revenue (around 10%) and earnings. On the other hand, at the industry level, sectors such as pharma and IT software are considered the least risky, while construction, textiles and metals are among the most vulnerable.
The energy industry, in particular the renewable energy segment, is going through a period of profound transformation, with the transition to green energy sources being driven by government policies and the need to reduce dependence on fossil fuels. Although affected by the transition to electric vehicles (EVs), the automotive sector is benefiting from a favorable context due to decreasing battery costs as well as government support for electrification. However, global demand for traditional cars is declining in major markets such as China, Europe and the US, putting pressure on both car manufacturers and their suppliers. Globally, Brazil and Mexico were the only major markets to post double-digit growth in the first half of this year. Global semiconductor sales fell 9% in 2023, but by the end of 2024 are expected to rebound more than 10%.
As for global chemicals production, it increased by +2.3% in 2023, while global revenues declined by around -14%, hurt by low prices. The construction sector has also been affected by inflation and high interest rates, which have reduced demand for housing and generated additional cost increases for builders.
After a strong post-pandemic boom, fueled by pent-up demand, sales of electronics, appliances and furniture have fallen since 2022. The purchasing power crisis and the slow pace of equipment renewal, has led to a slump in demand but there are nevertheless growth prospects for certain product categories, such as smart home devices, robots and healthcare equipment. While digital and AI technologies could enable some players to increase revenues by improving customer experience, growth prospects are stronger for the electronics segment, estimated to grow earnings per share by more than +15% over the next five years.
And the global IT services sector grew by around +6% in 2023 and is projected to grow by almost +10% by the end of 2024. Global spending is expected to increase for this sector, with spending driven by the US and the UK, where analysts expect it to cost $130,000 and $80,000 per employee, respectively. In 2023, IT services companies have reported a profitability margin of almost 10%, growth prospects are also quite strong for the sector, which is estimated to grow its earnings per share by +15% over the next five years.
The global base metals market is also expected to exceed $1.1 trillion by 2030, and the global mining market will reach over $740 billion. Recent growth and expansion in the global metals sector, including mining companies, has been fueled by the energy transition (from renewable energy to electric mobility) and high metal prices. However, the sector faces challenges, including geopolitical tensions, environmental regulations and the need for technological innovation.
In the pharma segment, large US companies generate about $450 billion a year, 1.3 times the revenues of European companies and 4.6 times those of Asian companies. Historically, pharmaceutical sales growth has always been driven by the oncology and immunology segments, two areas that have also been at the center of R&D spending. However, in 2024, one of the areas where sales growth rates will be particularly high is the weight loss treatments segment, which includes treatments for diabetes and obesity. In the long term, the main pillar of the industry is innovation, as there are currently still hundreds of diseases that cannot be completely prevented or cured, which means there is great potential for scientific exploration and growth. And mergers and acquisitions (M&A) are an effective and commonly used way to generate greater synergies and stimulate innovation in the industry.
For grocery retailers, the pandemic drove an increase in grocery sales in 2020 and 2021. The war in Ukraine and the subsequent period of very high inflation were also difficult periods, with declines in volume but increases in sales value. However, now food retailers have many products in the process of disinflation or even falling prices. As a result, food sales by volume hit a low at the end of 2023 in the US and many European countries. Retailers have also had to adapt their logistics and e-commerce strategy in response to changes in consumer behavior post-CoV, with online sales continuing to grow and/or be higher than before the pandemic in many markets. Meanwhile, non-food retail has also seen sales growth particularly for products with long life cycles. In this context, most product categories have experienced slow growth since 2023. Digital sales progressed in the US and the UK, but remained stable in continental Europe. As in many other sectors, retailers have managed to offset some of the volume decline by passing on higher prices to consumers.
Telecoms companies are facing higher interest rates and some are having to cut capital spending, which could be damaging to their long-term prospects. In a major crisis in purchasing power, many firms in the sector have not raised prices while their own costs have risen due to energy prices and rising wages. However, telecom companies reported a 31% profit margin in 2023.
For the transportation segment, increased capital spending resulted in an unprecedented 2023 inventory. However, inventories declined significantly in 2024 as production improved. In parallel, the weak economic backdrop caused a slowdown in new orders and made it difficult to increase inventories. In addition, in the medium to long term, the pressing need to decarbonize the transport sector will generate increases, particularly in the shipping and aviation industries. Thus, international regulations aimed at reducing GHG emissions will become increasingly stringent, affecting all types of transport, with aviation and maritime being the most difficult to decarbonize due to the substantial investment needed to renew fleets and the slow pace of technological improvement. Alternative fuels will also need to be available and cost competitive with conventional fuels.
After three years of losses, the airline industry reported a net profit of $27.4 billion in 2023 - earlier than expected. This was already +3.9% higher than the 2019 level. For 2024, the industry anticipates an annual profit of USD 30.5 bn. However, profitability will not be the same in all regions due to geopolitical tensions. Vessel sales have also hit record highs over the past two years, with further growth expected, with revenues in excess of USD 50 billion annually. For land transportation, electric buses and trucks are increasingly being introduced in developed countries, especially in Europe. Therefore, adapting roads to provide an extensive electric network will remain a priority and a challenge, even for railway companies, where the infrastructure for developing rail networks and signaling systems is needed.