Welcome to the June edition of FAQ’s and RAQ’s!
Here we answer client questions -- some asked Frequently, and others asked Rarely.
FAQ: What investments are hidden beneficiaries of Artificial Intelligence?
Imagine that you wanted to cash in on the invention of air conditioning. What’s the best move: buying shares in air conditioning companies or snapping up land in Arizona?
Investors today face a similar dilemma with artificial intelligence. The direct beneficiaries, like the big tech giants, are obvious. But the real question is: where are the hidden gems?
There may in fact be many. If AI lifts productivity across the economy, as many predict it will, the impact could be far-reaching.
Take one surprising example: municipal bonds. Municipal issuers are already employing AI to reduce costs and enhance credit quality.
Recent examples:
- The City of Williamsburg, VA, rolled out an AI Chatbot that reduces the need for human assistance by nearly 80%.
- The City of Akron, OH, cut chemical costs in its water filtration by 25% after introducing AI-powered monitoring software.
- Even Pittsburgh International Airport is getting in on the action, deploying AI-driven trash bins to sort between waste and recyclables, limiting the need for additional labor.
(Source: Moody’s)
Would we buy municipal bonds solely due to AI? No. But AI’s impact on areas like municipalities underscores the potential for AI to benefit huge swaths of the economy.
RAQ: Do I really need to save so much for college tuition for my children? Tuition levels are so high, they seem bound to fall.
Don’t count on tuition rates falling anytime soon! Higher education is inherently labor intensive, and salaries tend to rise across nearly every sector of the economy. Consequently, it’s unlikely that college costs and tuition will decrease significantly in the near future.
However, there is a silver lining. Tuition increases are slowing down. For the first time since the 1970’s, tuition inflation has fallen below the overall rate of inflation.
That trend may continue as the number of students attending college is projected to decline. According to McKinsey, the number of students enrolled in four-year colleges will fall 12% from its peak by the end of the decade, a result of a generational decline in the number of young adults. As a result, colleges will be forced to compete more fiercely for students, which could lead to greater tuition discounts. This shift may already be happening: the average tuition discount rate today is 56%, up from 50% in 2020. (Source: NACUBO)
Bottom line: A college education will remain a significant expense, and parents should remain diligent in their savings. The encouraging news, however, is that if tuition increases continue to lag behind inflation, the financial burden may not feel as overwhelming as it does today.
Have a question? Drop us a line at carlsongroup@rwbaird.com. We'd love to hear from you!