There are a number of reasons why investors should feel positive about Indian equities, despite a difficult 2011, according to Vincent Lagger, manager of the Swiss & Global Asset Management JB Chindonesia fund.

2011 proved to be a challenging year for Indian equities. Economic activity slowed due to tight monetary conditions, key political reforms failed to deliver and foreign investors remained on the sidelines. However, India's fundamentals are sound: corporates and financial institutions remain healthy and growth will return after the current cyclical slowdown.

Inflows from investors

After reaching a trough of 14x next fiscal year's earnings in late December amidst negative analysts' revisions, valuations of the Nifty index are at 16x today, still attractive compared to historic levels. Year-to-date, the Indian market has gained 26% in USD terms. In January foreign institutional investors bought $2.0bn of stock, versus net sales of $500m in 2011.

Monetary policy to become more pro-growth

Inflation remains a challenge, with core inflation still at around 7.4%. However, after 13 rate hikes in a row, recent comments from the Reserve Bank of India point to a switch to a more pro-growth oriented monetary policy, as the inflation outlook is becoming more benign.

Rural consumption: key driver

Rural consumption remains our favourite investment theme. The prospects for the rural economy keep improving thanks to labour reforms and rising farmer incomes. Purchasing power is passed down to farmers and the consumption boom outside urban areas is supporting many industries. Demand for cars and motorcycles, for instance, is booming as affordability increases.

Attractive value is starting to emerge among cyclical stocks in the capital goods and metals sectors. In addition, banks and other financials stocks will be among the main beneficiaries of a recovery in lending activity and improved economic sentiment.