Can Elbi, manager of the JB EF Europe Focus Fund (LU0026740844), explains why retailer Kingfisher should do well from the second half of this year as the UK DIY market recovers.
"The economic recovery in Europe is slowly taking hold on sustainable factors such as a domestic demand pick-up in the core and an export renaissance in the periphery. European companies still generate 45 per cent to 50 per cent of their overall revenues domestically, and this makes us confident that the earnings cycle should also finally start to move upwards after two disappointing years.
In our base case, we see 30 per cent to 40 per cent cumulative earnings growth for the STOXX Europe 600 Index over the next three years. As bottom-up stock pickers, our highest conviction ideas are SAP, Michelin, Arkema, SKF and [UK-listed] Kingfisher (KGF).
In the case of Kingfisher, the European home improvement retailer, the asymmetry we see is the underappreciated recovery in the UK DIY market. There is typically a six- to nine-month lag between a housing recovery and large-scale spending on DIY, and we expect Kingfisher to benefit disproportionately as of the second half of 2014."
Kingfisher was the fund's top contributors over March adding 24 basis points.
Investors Chronicle upgraded Kingfisher to a 'Hold' rating from 'Sell' on 11 April. We reported that the retailer is in acquisition talks with a French rival, Mr Bricolage, and that if the deal goes ahead it could boost Kingfisher's earnings by at least 2 per cent by the end of the 2016 financial year. We also said: "This deal would potentially give Kingfisher serious purchasing power and scale in France and it comes at a time when the market is excited about the possibility of a recovery on the continent."
