Market Focus Shifts to Strong Fundamentals Amid Volatility: SBI Funds Report

Amidst global market volatility, SBI Funds report highlighted a shift towards companies with strong fundamentals. Despite initial sell-offs, Indian markets hit new highs in August. Japan's unexpected interest rate hike added to global uncertainties. Quality stocks in defensives are outperforming cyclicals.

Amid the heightened volatility in the Indian stock markets, a report by SBI funds highlighted that the focus of markets will move towards the companies with good fundamentals and strong business models. The stock markets globally are facing volatility ahead of the US Fed rate cuts and following the US JOLTS report, which indicated the lowest level of job openings since 2021.

"We remain of the view that increasingly the market will become more discerning and move back towards companies which have strong business models, long-term earnings growth visibility, and sustainable cashflows," said the report. In August, Indian equities continued their upward trend, reaching new highs despite a turbulent start to the month in global markets. The report noted that the initial sell-off was driven by a combination of factors, including weakening economic data from the US, which reignited recession fears. While the US Federal Reserve hinted at possible rate cuts, any monetary easing would only impact the economy after a delay.

The report also added that Japan's central bank surprised markets by raising interest rates to 0.25 percent, ending its era of zero interest rates. This unexpected move caused the Japanese yen to strengthen against the US dollar. The shift in Japan's monetary policy worried markets, especially as it could reverse the yen carry trade. While markets have stabilized in recent weeks, the report stated that the situation remains uncertain, with the yen holding its gains and US bond yields maintaining their declines.

"The calm of the past couple of weeks has allowed equities to claw back their losses, but the dust has not settled yet as JPY continues to hold on to recent gains," the report added. Despite this, in August, Indian markets rebounded with the Nifty and Sensex rising by 1.1 percent and 0.8 percent, respectively. Midcap and small-cap indices also saw gains. However, the report noted a shift in the underlying market dynamics.

The report highlighted that quality stocks, particularly in defensive sectors like Consumer, Tech, and Healthcare, are now outperforming cyclical sectors such as Capital Goods, Real Estate, and PSUs. Amid global uncertainties and expensive Indian equity valuations, there is growing caution. While earnings remain solid in the medium term, the report stated that near-term growth is slowing due to weaker commodity prices and sluggish revenue growth. This environment could lead to reduced speculative activity in equity markets.

(With inputs from agencies.)