Mkt to see 10-15% downside in near-term: BofA Merrill Lynch

Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research feels 10-15% downside might be possible in the short-term, but the valuations still look supportive.

However, although global growth is heading down in terms of estimates, he indicated that there might not be a major downside risk. "We might continue to bump along in a sideways or negative trading range for the next few months," he added.
Baker expects the markets to be range bound and volatile. According to him, global growth will not offer a tremendous upside potential, and the macro backdrop will still sit on markets and push them sideways. Consensus estimates to fall by 5-6% post results: Macquarie Here is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video. Q: What have you made of the recent developments in Greece? How significant is the fact that George Papandreou has agreed to step down in the interest of much needed aid for Greece?
A: It is still probably a little too early to say. It is probably on balance and positive development that the PM has stepped down. There will be a new coalition government, working within the existing framework and existing agreement. It is positive from where we were at the end of last week. Q: When do you expect the Greek situation stabilise?
A: It looks like a day-by-day process. If we get the news on the new PM today, it might provide a degree of stability, but there are still some formidable challenges ahead.
You still need votes on the various agreed austerity programmes and new need for approval from the EU and Troika that the actual money will be now dispersed to the Greek government. Q: The focus is now increasingly on Italy as the Berlusconi government is under fire. How worried would you be about Italy? What is the assessment over there?
A: The ECB is in a very difficult position. Ultimately, the institution is trying to stabilise the situation and Asia which means slowing down the rise in Italian yields and stabilise the yield situation.
Whether that is through a lack of buying in their part or whether the market forces are just being too great, it remains to be seen. This week in early trading, we have seen further spike in Italian yields. So, the pressure is intensifying and not lessening on Italy at this point. Q: How high is the probability of a concrete package coming out in next two months? How would global markets pan out?
A: In the absence of convincing change or package proposal from Europe, we are very reliant on global growth appearing and continuing in the US and emerging markets (EMs). This will help buying time for Europe to come out with something more convincing.
If there is any challenge to the global growth situation, then it will make life very difficult for Europe to come out with its own solution to the crisis. Q: How much downside risk is there in markets now?
A: Given where the valuations are, we have got a degree of floor under markets. We rallied about 15% from the very recent lows, but it is not inconceivable. As much as 10-15% downside might be possible in the short-term. Valuations look supportive.
Although global growth is probably heading down in terms of estimates, there might not be a major downside risk. We might continue to bump along in a sideways or negative trading range for the next few months. Q: What is the likely scenario that markets will live through in the next few months? Do you see markets range bound, but volatile or do you see very sharper corrections?
A: The markets would be range bound and volatility. Global growth will be at a level, where it will not offer a tremendous upside potential. The macro backdrop will remain as important as ever. For now, it will still sit on markets and push them sideways rather than anywhere else.