In 2023, the economy performed better than expected, despite the steep increase in interest rates. The real economy demonstrated true resilience, as the world economy grew on average 3.0% in 2023. For 2024, lower economic growth is anticipated, and it is estimated to amount to app. 2.7% in 2024. Inflation is expected to be slightly higher than the central bank’s target, although a clear and evident downward trend in inflation is apparent. We expect 2024 to be promising for the following four sectors that we have singled out. Among others – Pharma, Automotive industry, Information and Communication Technology sector and Finance – are the ones that are expected on average to be poised for growth. We have outlined main expectations and growth rates, but as a disclaimer trends can vary geographically and on case-by-case basis specific risks should be estimated.

We expect 2024 to be promising for the following four sectors that we have singled out. Among others – Pharma, Automotive industry, Information and Communication Technology sector and Finance – are the ones that are expected on average to be poised for growth. We have outlined main expectations and growth rates, but as a disclaimer trends can vary geographically and on case by case bases specific risks should be estimated. In general, we believe that some industries will experience stagnation or even a deterioration of profit margins. Such a situation did not occur in 2021/2022 because, in the context of high inflation, companies could pass on costs to end customers. However, we believe that this trend is coming to an end, and future wage growth will surpass companies’ ability to transfer those costs to the final customer, thus hindering further margin growth.

Pharmaceuticals

The global pharmaceutical market is expected to grow at an average rate of 6% in 2024, after growing at app. 5.1% in 2023. In 2021 a strong growth of 10.5% was recorded as most markets showed above-average growth rates as the result of the beginning of the pandemic in 2020. In 2022 the global growth rates declined on average to 2.2%. When we look at the Croatian market medicine consumption in 2022 it grew 5.3% and we expect it to grow at an annual rate of 8.3% over the next five years. This is about 3 p.p. above the expected global pharma growth rate as Croatia’s consumption converges to EU average. In 2022 North America accounted for 52% of world pharmaceutical sales compared with 22% for Europe. The USA remains the biggest market for the new sales medicine as 64% of it was sold on the US market (period 2017-2022), while only 16.4% on the European market (top 5 markets). In high-growth pharmaceutical markets (21 countries*) only 3.5% of new medicine was sold in the period. As the USA remains the main market for Originator medicine, Europe and high-growth pharma markets are competitor markets for all the Non-originator and Generics pharma companies who are looking to increase their market share. Originator medicine is going to continue to show growing pressure on the value and negotiated prices so focus on generics and biosimilars in the European market remains the key trend. Originators are expected to grow at a CAGR of 5.3% until FY 2027. Generics, due to their lower price than originators, are the top choice of all state care funds and are expected to grow at a CAGR of 6.8% until FY 2027. As global citizens are aging, and the number of new consumers coming from less developed countries, generic pharma producer markets are growing. So, the name of the game in generics is volume growth and ensuing quantities and timely delivery of quality products.

Global Use of Medicines

Source: Global Use of Medicines 2023 Outlook to 2027

The pharmaceutical industry is the high-technology sector with the highest added value per person employed, significantly higher than the average value for high-tech and manufacturing industries. The pharmaceutical industry is also the sector with the highest ratio of R&D investment to net sales. This is why it can be a major driver of EU economic growth to ensure future competitiveness in the global markets. One of the main trends which is impeding this goal and is expected to continue in 2024 is the strong growth of emerging market economies. The main representatives are Brazil, China, and India. This is leading to a gradual migration of economic and research activities from Europe to these fast-growing markets. This is why some big European players are massively producing active ingredients on these markets and are also looking to acquire companies on these markets. The task of finding the right target is not easy as choice is limited. Nevertheless, we expect an acceleration of M&A in the pharma sector in 2024.

Pharma products are always kept out of the sanctioned territory despite geopolitical uncertainties on any territory in the world. VAT rates for medicine differ from country to country but they are usually always below 10% and medicine is considered non-discretionary good. As the demand for these products is growing and pressure on margins in the sector will be low this year, we find this sector is poised for growth. 

Global Medicine Spending and Growth 2019–2027

Source: INQVIA, 2023

* Algeria, Argentina, Bangladesh, Brazil, Colombia, Chile, China, Egypt, India, Indonesia, Kazakhstan, Mexico, Nigeria, Pakistan, Philippines, Poland, Russia, Saudi Arabia, South Africa, Turkey and Vietnam.

Automotive industry

2023 finally brought a steady recovery to the automotive industry. The YTD trend seen till the end of November clearly shows a recovery trend, with EU registration of new cars noting a double-digit increase of 15.7%. We do not expect further disruptions to this sector like what we have seen in 2021 & 2022, when semiconductor shortage slowed-down production of new vehicles impacted both by and geopolitical situation. In 2023 the sector witnesses double-digit growth due to pent-up demand from previous years. So, in 2024 we expect growth in the EU to continue, but at the single-digit growth rates. The main reason for lower growth in 2024 (but still a positive one!) comes from the development in one of the major EU markets, Germany. Looking at the last few months of new EU car registration, Germany reported a steep decline, slightly dragging overall growth. Germany reported a 5.7% YoY decline in new EU car registrations in November, as demand deflates. We expect some of the major EU markets to stagnate during 2024, as pressure of higher interest rates level affects total vehicle demand in 2024. Another important trend is improved supply chain communication so production will be sufficient for overall single-digit growth demand. Furthermore, most issuers in the global auto sector currently have solid balance sheets and sufficient financial stability to manage potential shocks with intact financial positions. The structure of the industry should further develop with an already established trend – the adoption of electric vehicles due to EU-adopted regulation for decarbonization. As a result, the EU diesel car market share has already decreased by 2.3 p.p. to 12.2% of total new EU car registrations.

We expect this sector to perform better than in previous year. Also, we expect whole value chain connected with automotive industry to recover and show growth in revenue and net income in 2024.

New total car registration per month

Source: ACEA, InterCapital Research

ICT

The global ICT industry outlook stands positive, just as in the prior year. In 2024 numerous forecasters anticipate further growth of global companies on the back of „AI“ developments. The returns of the „Magnificent 7“ (Apple, Microsoft, Google, Nvidia, Amazon, Facebook & Tesla) in 2023 are prime examples of market pricing in AI expectations, driving overall S&P 500 performance to 24.2%. With fewer and fewer recession forecasts, due to strong consumption, AI will continue to drive future growth in valuations. Incumbents in the technology sector will continue to reap the benefits of AI services, while service offerors in the sector will face a trend of competition incentivizing. The global recovery trend is expected to continue so investors remain optimistic about this sector. It’s estimated that globally, in the two upcoming years, a shortage of 3.5m IT experts will be present. The ICT industry in the region unanimously agrees that, in 2024, the industry will be marked by a pronounced shortage of ICT experts. Most companies emphasize they are busy with digitalization projects but are lacking qualified personnel. In the EU, operations will be materially influenced by European regulation with NIS2 being the epitome for IT infrastructure development. NIS2 is a directive for a high common level of cybersecurity across the European Union or a new „star” of EU legislation. The main goal of the NIS2 directive is a high common level of cybersecurity throughout the EU. Many companies and various organizations that until now were not included in the scope of the NIS Directive will have to start thinking about their own level of cyber security due to high penalties in case of non-compliance. Overall, this means that a large part of the market will have to implement and maintain cybersecurity measures, driving ICT infrastructure development in the EU.

Finance

The finance industry’s outlook for 2024 is mainly determined by higher interest rates, even if we see an easing of monetary policy. We are all aware of current inflation, which is finally starting to pace down. To fight inflation, CB steeply raised their rates (both Fed & ECB) and the cycle is probably at its peak.

Fed & ECB reference rates

Source: Bloomberg, InterCapital Research

Interest rates are expected to remain at elevated levels for quite some time. During 2024, we see three to four cut rates starting during Q2 2024. In other words, a 75bps or 100bps decline in the Fed’s reference rate, which is currently standing at 4%. Consequently, in 2024 inflation globally is still expected to remain at slightly higher levels compared to targeted levels from CB, but nevertheless, at low single-digit numbers. In the meanwhile, banks will experience enjoy a strong NIM (net interest margins) in 2024, as rates on loans grew much more pronouncedly compared to interest on deposits. Deposits are slowly migrating into other types of assets like bonds which is as expected, but at a low pace. Even though higher rates should shrink demand for loans, net interest income in nominal terms should rise significantly both in the US and EU. Consequently, investors who can yield 5% or below on safe bonds will remain disciplined and rational when buying riskier assets. However, financial institutions that naturally invest a big portion of their portfolio in bonds, such as insurance companies, will yield higher on their portfolio – resulting in better results from investments, which will boost their results. So, 2024 is expected to be a good year for banks and insurance companies.