The Rambam (towards the end of his commentary to Mishnayot Sanhedrin) lists what he considers to be the thirteen principles of our faith, the twelfth of which is to believe in the coming of Moshiach. This point is not unique to Lubavitch groups; it is part of the beliefs of all Jews. We believe that G-d did not forsake the world after the six days of creation. He continuously sees to it that history should unfold in the way He wants. "In the end of days" His kingdom will be accepted by all mankind, and the Melech HaMoshiach will represent Him.
This point of faith appears throughout the books of the prophets from the Torah of Moshe Rabbeinu to the nevua (prophecy) of Malachi. One of the two places in the Chumash (Five Books of Moses) where the principle of Moshiach is spelled out is in Parshat Balak. The Torah records the prophecy of Bilam who speaks of King David as well as his descendent - the Melech HaMoshiach.
Towards the end of the Mishneh Torah, the Rambam dedicates two chapters to the topic of Moshiach. He writes that the exact details of the coming of Moshiach are very unclear, and are at present not that important. A tendency to dwell on these details will lead one to neither a greater love for G-d, nor a greater fear of G-d. The important point is that we believe in the principle of the coming of a human being, who will be a descendent of King David. In another essay the Rambam points out that the Moshiach will be highly intelligent, a tremendous prophet, and admired and respected by all. He will be an unknown figure until the time he is "revealed", and his debut will take place in Eretz Yisroel.
We all have an obligation to hope for the coming of Moshiach daily, and to do whatever we can to hasten his coming. But what can we possibly do? The matter is not under our control? The Rambam explains that what we can do is daven (pray) to Hashem who does have control. This is formally done in the weekday shmoneh esrei where there is a special bracho (es tsemach dovid etc.) through which we plead with G-d to hasten the coming of Moshiach.
In the days of the Talmud it was optional to recite the bracha of "es tsemach dovid" either as a separate bracho, or as part of the preceeding bracha - "Veliyerushalayim ircha". Today the accepted practice is that these two themes are separated into two separate brachos. The reason it was originally considered acceptable to combine these two themes into one was that a complete rebuilding of Yerushalayim consisted of both a. rebuilding the Beis HaMikdash, and b. reestablishing the office of the government of Malchus Beis David there. The Rambam writes in the beginning of Hilchos Melachim that no other king (other than those of Beis David) may have their official palaces or official government offices in Yerushalayim. Yerushalayim is the official capital of Medinat Yisroel, especially reserved for the official government of that country. In fact, the generally accepted view in Shulchan Aruch is that the special rabbinic requirement to tear kriah upon seeing the old city of Yerushalayim in a state of destruction relates not so much to the fact that the city was the site of the beis HaMikdosh, but rather because it was the political capital of the Jewish medinah and the kriah represents symbolically our mourning over the loss of that medinah. Therefore, most have the practice not to tear kriah today when visiting the Old City, because it has become again the capital of the Jewish medinah.
There are those who argue that one can not establish a Jewish medinah in Eretz Yisroel before the coming of the moshiach. However, the Ohr Hachayim Hakadosh on this week's sedra offers a novel interpretation of the pasuk, "Darach Kochav MeYaakov, vekam shevet meYisroel". He explains it to mean that if Klal Yisroel wil be worthy, we would witness the emergence of the Jewish government in Eretz Yisroel in miraculous and supernatural fashions, similar to a shooting star. But if we will not be zoche, then an inferior quality government will emerge in Eretz Yisroel, lacking the charm and the luster of the shooting star.
Even though we may be dissatisfied with the memshala (the individuals running the Israeli government), we are overjoyed and thankful to have a Jewish medinah in Eretz Yisroel.