WEBVTT - Standard Life's Morris Likes Rockwell Collins, Schwab (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Charlie Pella. Thirteen minutes to go. Ahead of the

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<v Speaker 1>close on a Thursday, stock selling off. We've got the

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<v Speaker 1>SMP down eighteen points now, a drop of nine tenths

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<v Speaker 1>of one percent. Stocks heading toward the biggest drop in

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<v Speaker 1>three weeks, Apple leading an afternoon sell off in technology shares,

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<v Speaker 1>overshadowing all of those corporate deals, and strong results from Facebook.

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<v Speaker 1>Facebook up now by seven and a half percent to

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<v Speaker 1>one seventeen o six. So here's where we stand ahead

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<v Speaker 1>of the close. The Dow down one ninety five points,

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<v Speaker 1>a drop of one point one percent, and as DAC

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<v Speaker 1>is down forty eight points, a drop of one percent.

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<v Speaker 1>Ten You're up seven thirty seconds. Deal there one point

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<v Speaker 1>eight two percent, Gold up twenty twenty ounce to twelve

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<v Speaker 1>seventy a gain of one point six percent, and Rude

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<v Speaker 1>of eight tenths of one percent. Sixty nine on West

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<v Speaker 1>Texas in the media cruiting. I'm Charlie Pelton. That's a

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<v Speaker 1>Bloomberg business flash. You're listening to Taking Stock with Pim

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<v Speaker 1>Box and Kathleen Hayes on Bloomberg Radio. What to do

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<v Speaker 1>with your money in an investment environment where rates are

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<v Speaker 1>low and equities seem to be range bound. Let's find

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<v Speaker 1>out from Jeff Morris. He is the head of US

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<v Speaker 1>Equities for Standard Life Investments. They are based in Boston,

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<v Speaker 1>home to Bloomberg twelve hundred am, and he joins us

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<v Speaker 1>in the studio. Jeff, thanks very much for being with us.

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<v Speaker 1>Good afternoon. Alright, so just give us the top down

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<v Speaker 1>look right now about the investment world. Right. I can't

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<v Speaker 1>get much by buying government bonds. Stocks can either make

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<v Speaker 1>you're nervous or at least range bound for the time being.

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<v Speaker 1>And commodities, well, we've all known what happens to the

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<v Speaker 1>price of oil when we're not looking. So what do

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<v Speaker 1>you do? Well, I'm focused on the on the equity market,

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<v Speaker 1>and I have to say that given where the valuations

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<v Speaker 1>are for for US equities, I wouldn't recommend, you know,

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<v Speaker 1>broad exposure. I think it's important for investors to look

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<v Speaker 1>at a selective investment ideas. You know, for the longest time,

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<v Speaker 1>the beta trade worked for for for investors and tell

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<v Speaker 1>people what the beta sorry, the beta trade is just

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<v Speaker 1>playing the rising tide as as stops as stocks move

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<v Speaker 1>up from the market goes up, so you can buy

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<v Speaker 1>anything the market goes up. When you think about how

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<v Speaker 1>we came out of the financial crisis, there was ample despair,

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<v Speaker 1>you know, valuations were lower, and now the market is

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<v Speaker 1>has moved up, as escalated for some time and now

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<v Speaker 1>seems to be just chopping sideways trying to digest this

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<v Speaker 1>environment of slow growth and relatively high valuations. So it's

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<v Speaker 1>really a time I think that someone has to be

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<v Speaker 1>more focused on how they think about the market. So

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<v Speaker 1>what is your methodology to do that? Then we're about

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<v Speaker 1>halfway through earning season stablesnar stocks that are noted that

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<v Speaker 1>we're about just past the halfway marsfp uh what what

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<v Speaker 1>how do you then decide? First you start with an industry,

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<v Speaker 1>how do you just choose an industry? And how how

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<v Speaker 1>do you choose your individual companies? Well, at Standard Life Investments,

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<v Speaker 1>we use a focus on change investment philosophy, so we're

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<v Speaker 1>looking for at times when when there's change occurring with

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<v Speaker 1>companies or industries. We feel like during those transitions then

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<v Speaker 1>the market doesn't really price in what's what's happening, and

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<v Speaker 1>that's opportunities to buy you know, an undervalued security. So

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<v Speaker 1>we really haven't understand you know, where there is where

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<v Speaker 1>there is change occurring. Uh. The example of that right now,

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<v Speaker 1>well and right now in technology, there's there's a there's

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<v Speaker 1>a lot that's that's going on. We have old technology

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<v Speaker 1>and new technology. You know. One of the companies I

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<v Speaker 1>know is an opportune time to talk about it that

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<v Speaker 1>Facebook is one that we've held substantial positioning doing well today.

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<v Speaker 1>We really feel like there's a lot of a lot

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<v Speaker 1>of transition that we're going to see as as media

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<v Speaker 1>buying goes from you know, older sources to to more

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<v Speaker 1>more more digital source of of advertising. So that's that's

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<v Speaker 1>an example where changes occurring. There's also a change occurring

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<v Speaker 1>in in in older companies too, and and and more

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<v Speaker 1>established companies. I was thinking, for example, change in the

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<v Speaker 1>aerospace industribute because you have more efficient jetliners. Wonder if

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<v Speaker 1>you could speak to the issue of aerospace and defense.

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<v Speaker 1>So for commercial aerospace, we've been through a long up

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<v Speaker 1>cycle and we've seen the orders that Boeing has has

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<v Speaker 1>received a you know, an order from from China, Eastern today,

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<v Speaker 1>but there's been a long up cycle. In fact, the

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<v Speaker 1>market's really trying to digest Bowing right now and understand

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<v Speaker 1>if maybe that order cycle is starting to exhaust itself somewhat.

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<v Speaker 1>Both Boeing and Airbus got orders for about, you know,

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<v Speaker 1>a thousand plus jets last year. So far this year

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<v Speaker 1>it's maybe a hundred and fifty two hundreds, So it

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<v Speaker 1>really feels like that order pipeline is starting to to

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<v Speaker 1>to soften. So that's one thing where you have to

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<v Speaker 1>understand now, you know, the focus on change philosophy you're

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<v Speaker 1>looking is are we seeing a change here in the

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<v Speaker 1>commercial aerospace cycling? Is it's starting to soften? On on defense,

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<v Speaker 1>you know, there's the demand, is the demand is increasing

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<v Speaker 1>overseas for for demens defense assets is uh, you can

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<v Speaker 1>just look at the headlines and understand where that comes from.

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<v Speaker 1>But then also the domestic defense budget is starting to

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<v Speaker 1>inflect higher and finally we're starting to see some growth

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<v Speaker 1>in in that domestic spending, which is benefiting many of

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<v Speaker 1>the large defense primes, some which we've we've invested in.

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<v Speaker 1>Is an industry like defense, one that is by necessity

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<v Speaker 1>where you you're watching the elections, not so much like

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<v Speaker 1>sentiment and all that, but you know, at some point

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<v Speaker 1>do you did your team have to assess, boil boy,

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<v Speaker 1>if Trump's the president or Hillary Clinton and whoerever it is.

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<v Speaker 1>And of course the Congress is so important here too,

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<v Speaker 1>right if Republicans control the House, etcetera. That how I

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<v Speaker 1>would think that's something where you really have to focus

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<v Speaker 1>very closely on policy because spending driving defense and driving

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<v Speaker 1>these companies is the biggest thing. Clearly, the defense budget

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<v Speaker 1>is something to keep an eye on. You know, the

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<v Speaker 1>the analysis over over many decades and many different political

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<v Speaker 1>parties and in the White House and in Congress indicates

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<v Speaker 1>it's it's and there's not a tight correlation between which

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<v Speaker 1>parties in power. It's really the threat environment that drives

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<v Speaker 1>defense spending. And and that's what we're we're looking at.

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<v Speaker 1>We're thinking about how, you know, what's what's the evolution

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<v Speaker 1>A powerful change that's going on in the defense industry

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<v Speaker 1>is to try to create a more technologically advanced soldier,

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<v Speaker 1>you know, with more modern equipment. And and that spending

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<v Speaker 1>is really accruding to those that are providing the best

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<v Speaker 1>in the way of defense assets. So there's there's sort

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<v Speaker 1>of a technological change. But then also you know, unfortunately

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<v Speaker 1>the threat environment is right now that that that that

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<v Speaker 1>spending needs to needs to increase. I was just going

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<v Speaker 1>to bring up the topic of you get these big

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<v Speaker 1>contracts and then they have a life seemingly of their own.

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<v Speaker 1>For example, the contract for the F thirty five Joint

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<v Speaker 1>strike Fighter right Lockheed Martin, because I was noting that

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<v Speaker 1>the Pentagon's top weapons tester was explaining to Congress earlier

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<v Speaker 1>this week that the F thirty five remains immature and

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<v Speaker 1>provides limited combat capability, and yet they just ordered a

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<v Speaker 1>leven more aircraft. So is that that kind of company?

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<v Speaker 1>What What do you want to hear from a defense

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<v Speaker 1>contractor that makes you confident to want to be a shareholder.

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<v Speaker 1>What you want to hear is is a few things.

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<v Speaker 1>First of all, that the new programs are progressing as anticipated.

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<v Speaker 1>That the joint strike fighter has been in the news

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<v Speaker 1>for for years in terms of having a variety of

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<v Speaker 1>of technical issues here and there, but it's but it's

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<v Speaker 1>a solid program. In fact, you know, the capability that

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<v Speaker 1>comes from a fifth generation fighter is is just crucial

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<v Speaker 1>um in the world that we live in. I think

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<v Speaker 1>that one has to realize the complexity of of of

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<v Speaker 1>this program. This is one of the most sophisticated pieces

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<v Speaker 1>of technology that people have ever really created. So that's um,

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<v Speaker 1>it's understandable. There's going to be parts of it that

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<v Speaker 1>the occasional be glitches from time to time, but it's

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<v Speaker 1>it's it's moved along. You know, they're getting to the

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<v Speaker 1>point where they're seeing larger and larger contracts for it,

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<v Speaker 1>and it's and there's also you know, relatively strong international

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<v Speaker 1>demand as well as well too. So one of the

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<v Speaker 1>things you want to look for the defense attractors are

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<v Speaker 1>the solid are the major programs? Are they solid? And

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<v Speaker 1>then also what do they do with the capital? And

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<v Speaker 1>that's one thing that Lockheed has done an exceptional job

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<v Speaker 1>with is returning capital to shareholders in the form of

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<v Speaker 1>share repurchases or elevated dividends. And this is something that

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<v Speaker 1>investors have really appreciated over over a number of years.

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<v Speaker 1>How do the big players in aerospace and defense stack

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<v Speaker 1>up for you? You just mentioned Lockey, but Boeing, raytheon

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<v Speaker 1>General Dynamics, etcetera. So we've been we've been selective amongst

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<v Speaker 1>the aerospace and defense company. So we we we don't

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<v Speaker 1>own any Bowing right now. We feel like it's a

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<v Speaker 1>fantastic company with a large backlog, but feel like the

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<v Speaker 1>shares are are are fully valued. We like companies. You know,

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<v Speaker 1>Raytheon is a company that reported today and and there's

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<v Speaker 1>a little bit of concerned about the margins, but they're

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<v Speaker 1>very well placed to participate in international growth. So we

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<v Speaker 1>like that that particular stock. We also, you know, Rockwell

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<v Speaker 1>Collins is one that's that's attractive as well too. They're

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<v Speaker 1>a components supplier both on the commercial aerospace on on

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<v Speaker 1>the defense side, so we're able to find our um

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<v Speaker 1>you know, find our find our spots there and and

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<v Speaker 1>there's you know, there's opportunity when when you're looking for

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<v Speaker 1>changes occurring in industries and companies. You know, Rockwell Collins

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<v Speaker 1>is one where they're they're they're participating in some of

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<v Speaker 1>these new narrow bodies, like like Boeing's new seven three

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<v Speaker 1>seven UM that's that's going to be a powerful driver

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<v Speaker 1>for their for their fundamentals going forward. Can I get

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<v Speaker 1>your thoughts on the finance and banking industry for example,

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<v Speaker 1>maybe not huge banks, but you know First Republic as

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<v Speaker 1>well as maybe Charles Schwab and then a big bank

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<v Speaker 1>City Group. So you know, with First Republic, this is

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<v Speaker 1>one that we UH that that we really like. They

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<v Speaker 1>have an opportunity to expand their wealth management business. It's

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<v Speaker 1>it's a geographic expansion story as they build out from

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<v Speaker 1>their heritage in San Francisco and into other other markets

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<v Speaker 1>in the northeast. UH. They're doing a great job of

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<v Speaker 1>acquiring more my financial advisors and more wealth management assets,

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<v Speaker 1>and we think that's something that they can they have

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<v Speaker 1>room to run. Many of the larger banks, as you

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<v Speaker 1>mentioned City really have a difficult time growing at you know,

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<v Speaker 1>growing at rates that are quite frankly any faster than

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<v Speaker 1>the overall economy. So a smaller bank has that has

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<v Speaker 1>that opportunity to be able to grow. Also, the regulatory

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<v Speaker 1>burden is IS is much less on those on those

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<v Speaker 1>smaller banks. Charles Schwab is is also UH, you know,

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<v Speaker 1>a stock with a very attractive um. It's attractive in

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<v Speaker 1>the in the sense that they're able to gather gather

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<v Speaker 1>assets and and they've been able to we think about

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<v Speaker 1>innovation that's occurring. It's been one of the most innovative

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<v Speaker 1>companies and in financial services. With UH, you know the

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<v Speaker 1>innovation of of discount brokerage and the r A business

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<v Speaker 1>and so forth. So it's it's it's one that we like.

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<v Speaker 1>They're also very well positioned to benefit from when interest rates,

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<v Speaker 1>when short term rates ever start to increase. Who knows

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<v Speaker 1>when that will be, but at some point we'll start

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<v Speaker 1>to see rates go up, and and Charles schwab By

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<v Speaker 1>their uh By, their balance sheet is is positioned well

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<v Speaker 1>to benefit from that. Jeff Morris, thank you so much

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<v Speaker 1>for joining us today right here in our bloomberhou stood

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<v Speaker 1>in the New York City. Thank you very much, glad

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<v Speaker 1>to be here. He is head of US Equities at

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<v Speaker 1>Standard Life in Investments. He is interested in the defense

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<v Speaker 1>and aerospace industry, looks for change driven companies. This is

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<v Speaker 1>taking stock on Bloombergradio