Indian Stock Markets May Correct 15% After Elections

Over the next 6-8 weeks, Merrill Lynch expects concerns of a hung Parliament post-election and expected slowing in corporate earnings will likely worry the market. “We believe this could lead to a 15% correction in Indian stock markets,” the investment bank says in a report.

15% correction in BSE SENSEX translates to a target of 9000 for stock index in BSE.
It is not advisable buying stocks for long term investments before elections. Let the elections happen, let the government be in place and then one should buy stocks for long term horizon. Meanwhile one should spot the investment opportunities to take the decision.

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On the elections, the brokerage believes
(a) there will likely be a hung Parliament i.e. none of the three combinations - Congress-led UPA, BJP-led NDA and the Third Front - will be able to come to power

(b) post-election results new alliances are likely -regional parties like BSP and AIADMK will be important

(c) the probability of a Third Front government coming to power is still low but increasing in its view.

“Our best case scenario would be a Congress government but with the Left being a key ally in it,” it adds.

According to ML, most of the present alliances are fluid and many parties would be willing to reconsider their alliances post-elections. “We think 2 regional parties - Mayawati’s BSP and Jayalalita’s AIADMK would play a crucial role in deciding the Government. The role of the Left parties, though weakened, should also be important,” ML says.

Despite the break-down of seat sharing with Mulayam Singh’s SP in Uttar Pradesh and Laloo Yadav’s RJD in Bihar, ML thinks both will continue to be part of the Congress-led UPA. The investment bank thinks the UPA still has a slight edge since they can get Left support again. The BJP-led NDA, on the other hand, could need the support of BSP, Jayalalita’s AIADMK, Naidu’s TDP as well as its old ally BJD.

Commenting on the Third Front, Merrill Lynch says, “We think it would be extremely implausible that a Third Front government is formed without the support of Congress or BJP, because Congress plus BJP should gain nearly 50% of the total seats. However, if the Congress/BJP can’t form a stable Government, they may support a Third Front Government. While we think this is a lower probability event, the possibility has been increasing past few weeks.”

The brokerage also expects that Third Front government will be negative for the Indian stock markets.

“We think a positive scenario for the market is a BJP or Congress led government without the Left parties but has a low probability event in our view. Historically, markets have been edgy ahead of elections. We think concerns of a hung Parliament could lead to a 15% correction in markets this time,” the report adds.

“We would buy stocks defensively (Buy stocks of Hero Honda, Bharti) in the run-up to elections. We think infrastructure would be a priority for all Governments - Jaiprakash associates could be a gainer in the post-election scenario & therefore a stock to buy. We believe a Congress or BJP government without the Left could lead to reforms in
(a) privatization and oil reforms
(b) banking reforms
(c) FDI in retail, aviation, insurance etc,” ML said.
Source & Reference: Economictimes

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