Pratik Gupta, Head - Research, Deutsche Equity has a near term cautious view on markets. He believes interest rates upcycle is nearing its peak. Although, one minor rate hike is possible.

He expects earnings growth to come down to 16% and flat markets for the next few months. He said that Indian markets still offer the best ROEs.

Emerging markets risk levels have gone up, and the Yen carry trade risk has increased.

He doesn't recommend a bullish stand on midcaps with increasing risk to global liquidity. He is overweight on capital goods, cement and IT services.

Ex-oil and gas Index earnings growth and ROEs are seen at 20% and over 24%, respectively. He said cement sector may surprise in earnings, but may see a deficit next year.

Excerpts from CNBC-TV18's exclusive interview with Pratik Gupta:

Q: What have you made of rate concerns globally, and where would you peg the Indian market within that context?

A: As far as the Indian market is concerned, I think, you need to break that up into the near-term view and the long-term fundamental view. Near-term, we have a cautious view. I think, the interest rate upcycle is nearing its peak and we may have one more minor rate hike and this will depend on the FX inflow. That’s really the big worry for the Central Bank, in our view.

More importantly, from a fundamental long-term perspective, the underlying India story still remains intact. Yes, we will have some earnings slowdown this year down to about 16% odd, but India still offers one of the highest RoEs, not just in Asia but also in many other emerging markets, in the region of 24-25%. While for the market as a whole, we don’t expect the Sensex to go up too much between now and year-end and expect largely, a flat market. But within that, specific sectors, specific stocks offer enough opportunities and for long-term investors at the Index level, there is significant growth opportunity.

Q: How do you read the global situation, which has turned volatile over the last few days? Does it present any kind of risks to current valuations in India?

A: The risk will not be India-specific and we do recognise that lately risk levels have gone up for emerging markets, in particular. Especially, Yen carry-trade according to our currency strategist is increasingly becoming a bigger risk factor. So there could be a big global sell-off, and India will not escape that, which why we are cautious in the short-term. We don’t recommend a bullish stance on midcaps, for example, at this juncture given the increasing risk to global liquidity.

Q: I see that you are most cautious on the defensives in India - pharmaceuticals and FMCG. Could you explain that?

A: These are sectors that may appear defensive, but if you look at the valuations and the earnings growth outlook for these companies and the RoE trends, whether pharma, utilities or even traditional defensives like FMCG etc, we don’t see any value. We’d rather pay up for companies that have very strong earnings prospects, positive earnings outlook, where we see RoEs trending up.

This is something we don’t see in pharma and utilities. So our overweights would be sectors like capital goods, cement and even IT services, where the sector has massively underperformed and the underlying demand outlook is still pretty robust. While we are cautious on the market, we suggest not hiding in these so-called defensive sectors like pharmaceuticals and FMCG.

Q: You have given an earnings target of 16% - what does that mean in terms of Sensex earnings and where would you peg fair value for this market?

A: When you look at the overall earnings growth, it tends to be a bit misleading. In India, if you look at the Sensex earnings growth of 16% for this year, if you strip out the oil and gas sector, which is a heavyweight sector, the Index earnings growth jumps to about 20% odd and in the overall emerging market context, that is impressive.

Even for the oil and gas sector, some companies are adversely affected by the government regulations. Certain events like sum-of-parts valuations, on a headline earnings basis, may not give an attractive outlook. But on a sum-of-parts value basis, some stocks look attractive.

Having said that, if you strip out the oil and gas sector, you have earnings growth of 20%, your RoEs in excess of 24% for the rest of the market. Some sectors that will outperform are capital goods, cement, IT services, being our preferred choices.

Q: Why is it that you look at cement and IT? Have the stocks just been pushed down too hard or do you think they might surprise by way of earnings?

A: I think in the case of cement, we will probably be surprised by earnings. In fact, the price trend over the last few months has stayed firm and in certain areas like in South India, prices have actually moved up. Going foward, where there is a big concern on an industry-wide surplus, our analysts' view is that you will potentially see a deficit next year as well, given the delays in capacity commissioning. Even when capacity is commissioned, it doesn’t really ramp up to 100% on day one. So that’s as far as cement is concerned, where we expect an earnings driven surprise.

As far as IT services is concerned, it’s a question of how these stocks have performed. The entire sector has significantly underperformed in the market and there is some over pessimism building up. So for investors who have a longer-term horizon, six-nine months plus, these are stocks where the underlying demand outlook is extremely strong. The rupee is a temporary aberration and therefore, these companies still have pricing power and over time you’ll see these stocks perform.

Q: How extensively do you track the real estate sector at Deutsche and do you have a note out on DLF?

A: I’m afraid I can’t comment on that. We don’t really have a formal coverage of these stocks at the moment.

Q: What’s your view on banks - private sector and public sector?

A: In the short-term, there is going to be some pressure on banks given the capital raising that is going on. Fundamentally, we’d actually prefer the private sector banks at this stage. In the case of the PSU banks, there is also the issue of the pension liabilities, which haven’t been fully provided for. Also, with some of our foreign clients, there is the issue of FII limits, which limits the upside and acts as a disincentive. Even local clients keep wondering where the next marginal buy is going to come from.

But overall, India has a strong structural growth story in the realm of banks. They are probably one of the best plays on the domestic consumption theme, in the long-term. Therefore from a longer-term perspective, we like both the leading PSU and the private sector banks. But our preference would be for the private sector banks.