T. Rowe Price’s John Linehan has backed merger and acquisition (M&A) activity to become a prominent theme driving the US market in 2015.
The manager said the backdrop of current equity valuations, healthy corporate balance sheets and buoyant cash reserves lent itself to an increase in activity in the coming year.
Mr Linehan, who manages the T. Rowe Price US Large Cap Value Equity Fund, said there was little room for equities rise without delivering earnings growth, following a strong period of multiple expansion, where equities rally much more quickly than their earnings grow.
So he said the high cash balances - the result of higher profit margins, aggressive deleveraging and low capital spending - provide “ammunition” and incentive for corporate managers to pursue M&A at a time when cash returns appear restricted.
“With interest rates expected to remain low and attractive capital spending projects still scarce, M&A activity should continue to steer substantial amounts of corporate cash into listed shares in 2015.”
Mr Linehan added dividends and share buybacks would increasingly provide a home for the cash hoards, the latter having a particularly positive impact on earnings per share.
“We saw a strong pickup in corporate share repurchases in 2014, which we believe will continue this year,” he said.
