US financials and tech are set to benefit from a surge in M&A as companies with healthy cash flows seek to acquire businesses rather than grow organically, according to Steven Pollack manager of $4.5 billion (€3.4 billion) in equity strategies at Robeco.
Whilst M&A activity has remained weak in the last few years, Pollack favours cash-rich companies positioned to acquire smaller companies.
'A pick-up in M&A would make sense now as companies are all looking for growth opportunities when there is a lack of organic growth. We're surprised that there hasn't been more yet,' Pollack, who works alongside Duilio R. Ramallo, told Citywire Global from the team's office in Los Angeles.
A low interest rate environment, has helped fuel high-yield debt issuance that in turn can be used to finance such acquisitions, he added as a reason for anticipating an uptick after years of muted activity.
To tap the trend in the financials sector, Pollack, whose portfolios includes the mid-cap fund, Robeco US Select Opportunities Equities, has positions in online brokers Charles Schwab Corp and Ameritrade.
'If consolidation in the sector were to happen, then it would be very powerful in moving the share prices of these companies upwards. If it doesn't, then the downside isn't so great,' he said, adding that a pick up in economic sentiment would also help to drive profitability of online trading platforms.
Pollack also said he sees takeover opportunities as a way for companies to gain market share and expand profit margins in a subdued economic environment.
Hardware giants Seagate Technologies and Western Digital, which together make up over 90% of the disk drive market, recently acquired large competitors. Both companies are held in the fund.
'This kind of consolidation has provided a real change in these businesses. Whilst revenue has remained flat, profit margins have been higher based on better pricing,' said Pollack.
Roll on the rally
US equities markets have been on an upwards trend since the start of the year due to an ease in risk aversion amongst investors and more accomodative monetary policy.
'We don't think that you need a particularly strong economy to boost the stock market. We think that the stocks we hold are still attractive despite the recent rally," said Pollack.
Based on an outlook that the S&P 500 will rise 5% or 6% from its current level at around 1600 to year end, Pollack is confident on more cyclical sectors such as technology and consumer discretionary, as well as healthcare.
Sectors he avoids are REITs and utilties, considered more defensive and which caused a short period of underperformance in the fund last year when investors sought perceived safer assets.
'Investors are still risk averse and these stocks are looking more expensive on the recent rally,' he added.
'I don't see any great risks at the moment - economic growth is slow but steady. The sequester has already been priced into the markets,' he added with reference to the automatic spending cuts that kicked in at the beginning of the year.
Since its launch at the end of September 2011, the Robeco US Select Opportunities Equities returned 47.8%. The S&P 500 TR index returned 46.2% in the same period.