Now that the initial shock associated with the Brexit vote has eased, everyone’s attention is focused on analysing what the implications are of Britain’s decisive vote to leave the EU.Whilst the impact for the UK and EU will be significant, the risks to global growth (outside the UK and EU) are less well understood.
The impact on emerging markets, in particular domestically focused economies, such as India could be minimal. Whilst large Indian corporates such as the Tata Group and Infosys, which have significant European exposures will see an impact, the Indian economy itself will largely be immune. Given its domestic consumption focus, India is usually a net beneficiary in the short-to-medium term of any global demand shock, thanks to the negative impact on commodity prices and the likelihood of Fed rate hikes being pushed back; I believe the case will be no different this time around in any Brexit induced slowdown.
Brexit, therefore, does not change our view of the Indian technology sector or the investment potential we see in the long-term. If anything, Brexit has clearly demonstrated that ‘political risk’ is not purely an emerging market phenomenon. In fact, it does beg the question whether the risk premium we associate with emerging markets in general is overdone.
From a technology sector standpoint, Brexit’s global impact is also muted. That said, the UK tech sector will see upheaval as most tech firms set up in the UK are focused on the European market for their customer base. It’s too early to say whether investors will allocate capital away from UK technology towards other regions, particularly if the sector fragments.
Overall, given the fallout from Brexit, investment capital focused previously on Europe may well need a new home. With the recent healthy correction in valuations in India’s tech universe and long-term growth fundamentals very much in place, the sector presents an attractive proposition for investors seeking a re-allocation of capital away from the turmoil in Europe.
Author: Sumeet Pillai