Which sectors could benefit as AI end-users?
Companies in healthcare and financial services can potentially transform their business models through the use of generative AI. How can you profit?
The artificial intelligence (AI) boom has so far rewarded the companies building the hardware underpinning it. Experts believe that investors looking towards the future should focus on the companies that will win the next phase of the technology’s rollout.
“The AI story is evolving,” said Lisa Wang, head of EMEA investment strategy at Franklin Templeton Investment Services (FTIS). “For the past two years, investors have been rewarded for concentrating on a small number of technology stocks. We believe the next phase of the AI investment cycle is likely to be broader, creating opportunities across different sectors and markets.”
It may be that the cycle is already beginning to turn against the AI infrastructure suppliers. FTIS recently noted in a multi-asset outlook report seen by MoneyWeek that while AI adoption is continuing apace, there are signs that it is starting to become commoditised and that the customers of so-called ‘hyperscalers’ are less willing to pay for “expensive marginal AI gains”.
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If AI is becoming more price competitive, this could play out to the benefit of the companies putting it to use to improve their performance. Where should you go to look for these?
Which sectors are currently using AI the most?
Sanjiv Tumkur, head of equities at wealth manager Rathbones, says the sectors that are currently investing the most into generative AI (genAI) as users (outside the technology sector) are healthcare, financial services, retail and consumer, manufacturing and professional services.
Healthcare
“In healthcare, AI is being used to improve productivity in the pharmaceutical R&D process,” Tumkur told MoneyWeek. “For example, helping design new molecules to optimise potency and reduce side effects, providing tools to create 3D protein structures and predict interactions, identifying promising trial patients, and significantly speeding up the drafting of clinical trial protocols and of regulatory submissions.”
Financial services
Financial services like banking and insurance potentially stand to gain as AI end users as they have substantial middle- and back-office functions as well as customer service operations that could be automated by AI.
“However these sectors are highly competitive and gains typically get eroded and replicated, with few players earning sustainably attractive returns on equity,” Tumkur added, “so we are not confident in the sector being able to see a step-change in profitability through employing genAI.”
An exception to this rule is JPMorgan Chase (NYSE:JPM). Not only is it the US’s largest bank but it is also the one that spends the most on technology, with an annual technology spend of around $18 billion of which approximately $2 billion is thought to be on AI.
“JPMorgan is already seeing significant benefits from genAI (quantified at $2 billion in realised annual value) through cost savings and revenue gains in for example real time fraud detection, much faster processing of loan agreements, and improved regulatory compliance,” said Tumkur.
Retail and consumer staples
Many retail companies have already adopted AI into areas of their business like logistics and online retailing.
Walmart (NASDAQ:WMT) is a prime example of the kinds of retail and consumer staples businesses that are harnessing the benefits in marketing, data analytics, demand forecasting, customer experience and supply chain optimisation that AI potentially offers, according to Tumkur.
Are there buying opportunities in AI end users?
Software, publishing and data analytics companies are all investing heavily into genAI. RELX (LON:REL) for example has a product called Lexis+ AI for legal professionals which uses conversational searching and aids legal drafting.
But these sectors are being punished by the market at present; their “ability to withstand the more general threat of external AI agents is being questioned currently, so stock prices are discounting more risks than benefits from genAI currently”, said Tumkur.
Depending on your perspective, you might see this as a buying opportunity. Many professional investors believe sectors and companies like these have been unduly or prematurely sold off.
But despite its share price falling 39% in the year to 14 July, RELX still trades at 22 times its earnings over the last year – it’s not a cheap stock, but it still has some risk attached to it, so you should think carefully before jumping into opportunities.
How to invest in AI end users
You might feel that you can pick the individual companies that could benefit from being AI end users, and some that the experts see as beneficiaries have been highlighted in this article already.
But in general, picking individual stocks is a difficult challenge, even for the professionals.
As yet there is not a wide array of funds or strategies that specifically target AI end users (without, at the same time, boosting your exposure to the producers).
One possible option to consider though is the iShares AI Adopters & Applications UCITS ETF (LON:AIAA). This exchange-traded fund (ETF) tracks the STOXX Global AI Adopters & Applications Index which mostly includes companies that are adopting AI. Top holdings as of 13 July include cyber security firm Palo Alto Networks (NASDAQ:PANW) and finance companies Barclays (LON:BARC) and Visa (NYSE:V). Meta Platforms is its second-largest holding, though, so it does still add some hyperscaler exposure.
Or, for funds that invest in the sectors that Tumkur highlighted as potential AI winners, you could consider the Worldwide Healthcare Investment Trust (LON:WWH), the Vanguard Financials ETF (LON:FINW) (whose top holding as of 13 July is JPMorgan Chase) or the Xtrackers MSCI World Consumer Staples UCITS ETF (LON:XDWS) (Walmart is the top holding as of 13 July with over 11% of assets).
