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. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center