PSigma's Abate predicts M&A boom in US

There will be a surge of M&A activity in the US this year as the economic recovery gathers pace, says PSigma's James Abate.

Abate, who runs PSigma's American Growth fund, says the number of M&A deals in the US last year bettered 2009 levels and are following the trend of 2002 to 2004.

The manager says lower economic and interest rate volatility plus lower risk aversion will fuel a third consecutive year of strong US equity returns.

"In 2011, M&A volume is likely to boom as companies search for top line growth as well as cost-cutting synergies from acquired assets.

"In addition, several high profile growth companies such as LinkedIn, Skype, and Facebook will prepare to go public, contributing positively to sentiment.

"Both of these factors are likely to lead to a rise in the overall stock market valuation multiple. Even a small change from a P/E of 14x to 16x will drive the market higher by roughly 14%, assuming all else remains constant," he says.

Abate believes positive sentiment on the economic recovery from corporations and investors will also drive a surge in IPOs this year. 

The manager says it is likely interest rates will rise, but played down the risk of inflation. He believes areas which performed well last year, such as small and mid caps, will continue to produce strong growth this year.

"From a sector standpoint, it is likely 2010's winners will do well in 2011, with the possible addition of the financial sector, which will be rewarded from a valuation perspective for all the efforts in putting its problems behind it," says Abate.

"With many regional banks still trading near book value, big upside potential exists."