Market may correct 15% post election

MUMBAI: 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 the markets,” the investment bank says in a report. 

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