Chris Wood predicts market correction on potential BJP setback and possible capital gains tax changes

In a recent report, Jefferies' analyst Christopher Wood identified a potential correction trigger for the Indian stock market: a poor performance by the incumbent BJP government in the ongoing six-week-long general election.

The election results are expected on June 4. In his latest "Greed & Fear" note, Wood highlighted that emerging market foreign investors might reduce their investment in India.

"This is why a repeat of the shock BJP defeat in 2004 remains unlikely in the extreme. At that time, the Sensex corrected by 17 percent in the two days after the election results on May 13, 2004. In GREED & fear’s view there would be an even worse outcome in the event of a repeat of such a shock result," Wood wrote.

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Wood also emphasized that a disappointing result for Prime Minister Narendra Modi's BJP in the Lok Sabha elections could prompt this market correction.

Not only this, he also indicated that changes to the capital gains tax structure anticipated in the upcoming full Budget later this year could lead to a stock market correction.