Which industries stand to gain from using AI?

Generative AI has the potential to change the business models of financial services and healthcare companies

How do you make money?

Thus far, the companies creating the hardware that powers artificial intelligence (AI) have benefited from the boom in AI. According to experts, investors should concentrate on the businesses that will succeed in the next stage of the technology rollout.

"The AI story is evolving," stated Lisa Wang, Franklin Templeton Investment Services' (FTIS) head of EMEA investment strategy. "Investors who focused on a limited number of technology stocks have benefited over the last two years. We think the next stage of the AI investment cycle will probably be more expansive, opening doors in a variety of industries and markets."

It's possible that the suppliers of AI infrastructure are already starting to lose ground. While AI adoption is still accelerating, there are indications that it is beginning to become commoditized, and customers of so-called hyperscalers are less willing to pay for "expensive marginal AI gains," according to a multi-asset outlook report obtained by BFIA from FTIS.

Businesses using AI to boost productivity may benefit if the technology becomes more affordable. Where should you search for these?

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Which industries are most utilizing AI right now?

Healthcare, financial services, retail and consumer, manufacturing, and professional services are the industries that are currently investing the most in generative AI (genAI) as users (outside the technology sector), according to Sanjiv Tumkur, head of equities at wealth management Rathbones.

Health care.

"AI is being used in healthcare to improve productivity in the pharmaceutical RandD process," Tumkur stated to BFIA. For instance, assisting in the design of novel compounds to maximize potency and minimize side effects, offering resources to generate three-dimensional protein structures and forecast interactions, identifying potential trial participants, and greatly expediting the creation of clinical trial protocols and regulatory submissions."

In a biotech lab, a professional scientist uses a laptop to conduct genetic research.

Banking services.

Because financial services like banking and insurance have significant back-office and middle-office tasks as well as customer service operations that AI could automate, they may benefit as AI end users.

Tumkur continued, "We are not confident in the sector being able to see a step-change in profitability through employing genAI because these sectors are highly competitive and gains typically get eroded and replicated, with few players earning sustainably attractive returns on equity."

JPMorgan Chase (NYSE:JPM) is an exception to this general rule. Not only is it the biggest bank in the US, but it also spends the most on technology, spending about £18 billion a year, of which about £2 billion is believed to go toward artificial intelligence.

According to Tumkur, "JPMorgan is already seeing significant benefits from genAI (quantified at £2 billion in realized 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."

Consumer and retail staples.

AI has already been incorporated into many retail businesses' operations, including online and logistics.

According to Tumkur, Walmart (NASDAQ:WMT) is a prime example of the kinds of retail and consumer staples companies that are utilizing AI's potential advantages in marketing, data analytics, demand forecasting, customer experience, and supply chain optimization.

Is it possible to purchase AI end users?

Businesses in the fields of software, publishing, and data analytics are making significant investments in genAI. For instance, Lexis+ AI, a product from RELX (LON:REL) for legal professionals, uses conversational searching to help with legal drafting.

However, according to Tumkur, the market is currently punishing these industries because 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."

Depending on your viewpoint, you may consider this to be a purchase opportunity. These industries and businesses, in the opinion of many professional investors, have been overly or prematurely sold off.

However, RELX is still trading at 22 times its earnings over the past year, even though its share price dropped 39 percent in the year ending July 14. It's not a cheap stock, but it still carries some risk, so you should exercise caution before seizing opportunities.

How to invest in end users of AI.

You may believe that you can identify specific businesses that stand to gain from being AI end users; some of the companies that experts believe stand to gain have already been highlighted in this article.

However, choosing individual stocks is generally a challenging task, even for experts.

There aren't many funds or strategies that specifically target AI end users yet (without also increasing your exposure to the producers).

The iShares AI Adopters & Applications UCITS ETF (LON:AIAA) is one potential choice, though. The STOXX Global AI Adopters & Applications Index, which primarily consists of businesses implementing AI, is what this exchange-traded fund (ETF) tracks. Financial firms Barclays (LON:BARC) and Visa (NYSE:V) and cyber security company Palo Alto Networks (NASDAQ:PANW) are among the top holdings as of July 13. However, it does add some hyperscaler exposure because Meta Platforms is its second-largest holding.

The Worldwide Healthcare Investment Trust (LON:WWH), the Vanguard Financials ETF (LON:FINW), which has JPMorgan Chase as its top holding as of July 13, or the Xtrackers MSCI World Consumer Staples UCITS ETF (LON:XDWS), which has Walmart as its top holding as of July 13 with more than 11 percent of assets, are other options for funds that invest in the industries that Tumkur identified as possible AI winners.