When investors look towards emerging Asia, much of their attention shifts to China. After all, the nation is the 800-pound gorilla in the BRIC acronym, and the potential to tap into its billion plus residents with their increasing wealth is one the greatest growth stories going forward. Nonetheless, China's growth story has been well documented and has been underway for many years now. For investors looking for perhaps a stronger growth story in emerging Asia, BRIC middle-child India could offer some of the better long-term returns. An assortment of factors make the growing nation attractive, despite the nation's current inflationary woes and the recent market sell-off has opened the opportunity for investors to once again add the nation at cheaper prices.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Better Option Than China
The long-term promise for India is great. By 2013, analysts at Morgan Stanley believe that India's economy will grow faster than China's and is expected to bypass the United States by 2025. As improving demographics, structural reforms and globalization continue to take hold in the nation, India has seen above average GDP growth rates for quite some time. However, this growth has produced some unintended consequences. Inflation in India is the highest among the BRICS, rising to a 13-month high of 9.78%. India's central bank has raised interest rates by 3.5% since March 2010 and recently hiked rates for the 12th time. Overall, the $1.7 trillion Indian economy expanded 7.7% during the last versus a year earlier. This was the slowest pace since 2009 and could signal that the rate hikes have finally started to rein in inflation.

Despite the nation's inflationary pressures, there is a lot to like about India, including its growing middle class. The nation's middle class has grown from about 8% of the population in 1980 to about 33% now. This growth is creating a robust domestic market that is relatively shielded from any global softness. The current savings rate in India is around 35% of GDP and some analysts highlight that this will be India's greatest strength as the economy can domestically support itself in these times of economic cooling.

In addition, the nation is seeing vast improvements and growth in its infrastructure. Projects such as pollution and water systems, power plants, light railways and airports are now being constructed at a rapid pace. To attract outside infrastructure investments, India has begun relaxing rules that prevent foreign investors from buying corporate bonds used to fund these projects. The ceiling on foreign investment in these infrastructure bonds is being raised to $25 billion.

Stalking the Elephant
With the latest rate hike, Indian equities have fallen towards their 52-week lows, but they now trade in line with their historical P/E of 18. While there could be some additional downward pressures on Indian equities, now could be a good time for investors to consider adding the nation to a portfolio. Both the PowerShares India (NYSE:PIN) and WisdomTree India Earnings (NYSE:EPI) are the two liquid funds that track the nation and can be used for a proxy. For investors looking for more of a discount on their Indian exposure, the close-ended India Fund (NYSE:IFN) currently trades at a 7.7% discount to its NAV.

The new middle class is creating vast opportunities for India's banking sector. Both ICICI Bank (NYSE:IBN) and HDFC Bank (NYSE:HDB) are some of the world's best run banks and offer a great way to tap this potential. Currently, less than 60% of Indian citizens have a bank account and less than 2% have access to credit, meaning there is plenty of future development ahead.

While many investors know about India's leadership in IT services via companies such as Wipro (WIT) and Infosys (INFY), the nation is also poised to become a leader in pharmaceuticals. Dr. Reddy's Laboratories (NYSE:RDY) manufactures a wide range of generic drugs and recently partnered with GlaxoSmithKline (NYSE:GSK) and Fujifilm (OTCBB:FUJIY) in which to help market its generic drugs in other emerging markets and Japan.

The Bottom Line
Despite its inflationary pressures, India's strength and investment potential continue to grow. Overall, the nation represents a great long-term play and investors can reap the rewards by choosing ETFs or individual Indian equities like Tata Communications (NYSE:TCL). (For additional reading, take a look at The Indian Stock Market 101.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Hong Kong

    Learn about the iShares MSCI Hong Kong fund, which invests in various equities of companies listed on the Hong Kong Stock Exchange.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Growth

    Take a close look at the Vanguard Small-Cap Growth ETF, which focuses on domestic small-cap equities with a fundamental growth strategy.
  5. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  7. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  8. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  9. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!