Sensex could gain 10% if Modi comes to power: BofA-ML

'May dip 20% if a fragmented coalition cobbles together a govt at the Centre'

The stock markets could gain up to 10 per cent in the remainder of the year if the Bharatiya Janata Party (BJP) coalition led by its prime ministerial candidate Narendra Modi comes to power.

On the other hand, markets could drop up to 20 per cent if a fragmented coalition government were to form the next government at the Centre, according to the India Equity Strategy report of Bank of America Merrill Lynch released on May 2.

"The market is likely to continue to be soft over the next two weeks, as investors take some risk off the table. The last opinion polls were forecasting the BJP-led coalition government 260-265 seats. If the results come in line with the opinion polls and we get a stable coalition, we expect a 10 per cent rally in markets from current levels by year-end," said the report authored by research analysts Jyotivardhan Jaipuria and Anand Kumar.

"If the elections throw up a surprise and we end up with a fragmented coalition, we believe the market would reverse its gains and we could see a sharp 15-20 per cent correction," it added.

A 10 per cent upside would take the BSE Sensex, an index whose movements are held to be representative of how the market is doing, to 24,644.28 levels. A 20 per cent downside could take it to 17,923.11 levels, based on Friday's close at 22,403.89. The corresponding upper and lower levels for the National Stock Exchange's Nifty index would be 5,355.84, and 7,364.28, respectively. The Nifty closed at 6,694.80 on Friday.

If election results meet the markets' expectations, then an appreciating rupee would shift the focus to companies whose business will depend on India's domestic economy.

Bank of India Merrill Lynch suggests three themes to play this shift: high quality cyclical companies; those that would benefit from reform moves; and, beaten down cyclical stocks such as infrastructure companies and public sector banks.