Like many equities from emerging nations, Indian stocks have slid downwards over the last few months, as investors have once again shunned risk. High inflation and local government corruption have resulted in a decrease in foreign investment. So far this year, foreign investors have been net sellers of Indian equities to the tune of $300 million. In 2010, foreigners bought $29 billion of Indian stocks. However, as many investors flock to the exits, a contrarian play may be in order. The long-term outlook for India is still rosy and now could be a great time to consider stocks within the nation. (For related reading, learn how to Protect Your Foreign Investments From Currency Risk.)

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Short-Term Problems, Long-Term Promise
India's stock market benchmark, the Sensex, has fallen about 18% in 2011. It's not hard to see why. Over the last two years, inflation in India has been dangerously high. Wholesale price inflation currently sits at around 10%. To that end, India's central bank has raised interest rates by 3.5% since March of 2010 and recently hiked rates for the 12th time. This has caused growth to slow in the nation. Analysts now estimate that economic growth over the next few quarters will drop to around 6.5%. In addition, a plethora of allegations of corruption in both local and provincial governments have begun to take hold. This includes one huge case of alleged fraud involving the awarding of telecom spectrum in which the highest ranking telecom minister is believed to be involved. Protests by Indian citizens are on the rise and recently several local government officials have been shown the door.

Despite these short-term hiccups, the outlook for India is still rosy. Analysts at Morgan Stanley (NYSE:MS) estimate that by 2013, India's economy will be growing faster than China's and is expected to bypass the United States by 2025. The Indian economy is also very domestically orientated. The same internal protections that shielded it from the global crisis in 2008 should help protect it from any real problems stemming from Europe today. This includes its large middle class. The nation continues to spend vast dollar amounts on improving and growing its infrastructure. Projects such as pollution control and water systems, power plants, light railways and airports are now being constructed at a rapid pace and will ultimately benefit India's citizens.

Finally, Indian equities continue to remain reasonably cheap. Fund manager Sanjiv Duggal, who runs a $3.2 billion Indian equities fund for HSBC (NYSE:HBC) (one of the biggest covering the region) recently said of the nation's stocks, "Performance in the Indian equities market at the moment is not about Indian companies, this is about investor sentiment towards India." (To learn more about investor sentiment, read Investors Intelligence Sentiment Index.)

Adding Exposure
With the sentiment in India currently still in the dumps, now could be a great time to add exposure to the nation. Both the PowerShares India (ARCA:PIN) and the WisdomTree India Earnings Funds (ARCA:EPI) offer both broad swaths of Indian equities like Sterlite Industries (NYSE:SLT) and Sun Pharmaceuticals. These funds offer a great starting point for Indian-focused investors. For investors seeking more of a "discount" on their Indian investment, the closed-end India Fund (NYSE:IFN) currently trades at an 11.45% discount to its net asset value. This gives investors more of a cushion should the equities rout continue.

India's internal consumer story was its saving grace during the credit crisis and will be a major contributor to its future growth. The nation's middle class has grown from about 8% of the population in 1980 to about 33% now and features a 35% savings rate. The EGShares India Consumer ETF (ARCA:INCO), along with the Market Vectors India Small-Cap (ARCA:SCIF), allows investors to tap into this robust domestic market.

The Bottom Line
As the markets have shunned risk, Indian equities have fallen by the wayside. High inflation, slowing growth and political corruption have hindered investment in the nation. However, the long-term promise for India is still great. For contrarian investors, the time could be right to add Indian equities to a portfolio. The previous ETFs along with the iPath MSCI India (ARCA:INP) make ideal choices. (For related reading, see The Benefits Of ETF Investing.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Tickers in this Article: MS, HBC, PIN, EPI, SLT, IFN, INCO, SCIF, INP

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