MILES JOHNSON: Contrarian investors seeking out ways to wager that an eventual Brexit will be less damaging to the UK economy than the market currently expects must select their tools carefully. Trying to predict with any accuracy where the pound will trade is the financial equivalent of licking one's finger and sticking it in the air. The direction of the FTSE 100, meanwhile, is far more tied to commodities prices than the future of the British economy. So the job of the true Brexit contrarian should be instead to seek out the financial assets that possess characteristics that can allow for more precise handicapping when compared to the vagaries and vicissitudes of the foreign exchange markets.
There are currently few more vomit-inducing investments in today's market than shares in UK estate agents, which are, unlike other sectors, judged to be exposed to Brexit, such as airlines and banks, remain very much down since last June's referendum. There are two prongs to this current pessimism. The first is that the market believes that Brexit will diminish London's appeal as a hub for international business, meaning that house prices will fall, transaction volumes will drop, and the estate agents who cream off fees from this activity, such as Foxtons, will suffer.
The second part of this is that these old style, highstreet estate agents like Foxtons are facing new, online competition and at the same time greater regulation of the fees that they can charge to their rental customers. Foxtons, which is entirely focused on the London property market, has already warned that transaction volumes are likely to remain low for the foreseeable future. Yet its shares currently appear to be pricing in a far worse downturn than that of the 2008 financial crisis, when housing transactions in London fell by almost half. With no debt, positive free cash flow, and a dividend yield of over 6%, Foxtons currently trades at a valuation that appears to be pricing in the very worst. Any sign that the worst may not pass over the next year, and the market is likely to sharply reappraise its prospects.
