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The stock markets could gain up to another 10% in the remainder of the year if the Bharatiya Janata Party(BJP) coalition led by Narendra Modi comes to power as per market expectations.
Markets could drop by up to 20% if a fragmented coalition comes to power instead, according to a Bank of America Merrill Lynch India Equity Strategy report dated May 2.
"The market is likely to continue to be soft over next 2 weeks, as investors take some risk off the table. The last opinion polls were forecasting the BJP-led coalition government at 260-265 seats. If the results come in line with the opinion polls and we get a stable coalition, we expect a 10% 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% correction," it added.
A 10% upside would take the BSE's Sensex, an index whose movements are held to be representative of how the market is doing, to 24,644.28 levels. A 20% downside could take it to 17,923.11 levels; based on Friday's close of 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 come in as per expectations, then an appreciating rupee would shift 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 including infrastructure plays and public sector banks.
