Brexit puts investors in risk-averse mode

Until today, year 2016 was looking seemingly positive for real estate sector in terms of investment inflows (read PE or FDI inflows), but now that is somewhat at risk. The real estate sector in India will continue recovering on the back of a resilient Indian economy and strong capital inflows. Brexit will not disturb that recovery much, since India’s office market leasing is dependent only by 5-7% on UK-headquartered companies, and investments and activity of PE Funds from EU countries is more in India than in the UK. 

The first reaction of investors to a situation like this is to exit from sectors that are perceived risky. Given the Indian stock markets’ recent performance, real estate was considered risky until recently; it had only begun to emerge out on the back of policy reforms like RERA and other factors providing a positive market momentum. Given a risk-off sentiment, realty stocks could witness selling pressure as investors scramble for safe-haven sectors such as FMCG or pharmaceuticals. Several major IT firms such as Infosys, TCS and HCL Tech earn a third of their revenues from the EU. 

A possibility of EU slowing down will have an adverse impact on their revenues. The IT sector is a leading occupier of office space in India every year. Retail wise, in 2015 many European retailers entered India as part of their expansion strategy to new markets. We had anticipated this trend to continue in 2016. However, if the EU economic outlook weakens, their expansion strategies may be reconsidered. 

Given that BREXIT has happened, we foresee US Federal Reserve to defer their decision to hike interest rates, which is positive for the emerging world, including India. India’s bi-lateral trade with Great Britain is export surplus, which is good for India. 

However, compliance cost for India’s exports will rise. At the same time, India can negotiate more favourable trade terms with Britain. After losing out to free trade with the EU, Britain will be under pressure to look for balanced trade with big emerging economies like India, which is the fastest-growing economy.