Focus Shifts to Quality Stocks Amid Market Volatility: SBI Funds Management Report

Amidst market volatility, a report by SBI Funds Management highlights a shift towards companies with strong fundamentals and business models. Global markets experienced turbulence due to US economic concerns and surprising moves by Japan's central bank. Despite initial sell-offs, Indian equities rebounded in August, driven by quality stocks in defensive sectors.

Amid heightened volatility in the Indian stock markets, a report by SBI Funds Management highlighted that market focus will shift towards companies with strong fundamentals and robust business models. Global stock markets are experiencing volatility, influenced by factors like the US Federal Reserve's anticipated rate cuts and the US JOLTS report revealing the lowest 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,' stated the report. Despite global turbulence in August, Indian equities continued their upward trend, hitting new highs. The initial market sell-off was driven by weak US economic data, sparking recession fears. While the US Federal Reserve hinted at potential rate cuts, any monetary easing would have a delayed economic impact.

The report also mentioned that Japan's central bank unexpectedly raised interest rates to 0.25%, ending its zero interest rate era, which strengthened the Japanese yen against the US dollar. This policy shift worried markets due to potential reversals in the yen carry trade. Despite recent market stabilization, the yen continues to hold its gains while US bond yields decrease.

'The past couple of weeks have allowed equities to regain losses, but uncertainty remains as the yen maintains its recent gains,' the report noted. In August, Indian markets saw a rebound, with the Nifty and Sensex rising by 1.1% and 0.8%, respectively, and gains in midcap and small-cap indices. The report highlighted a shift in market dynamics.

Quality stocks, especially 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 high Indian equity valuations, caution is growing. Although medium-term earnings are solid, near-term growth is slowing due to weaker commodity prices and sluggish revenue growth, potentially reducing speculative activity in equity markets.

(With inputs from agencies.)