How Can Indian Investors Buy Blue-Chip Foreign Stocks? Guide By Mohnish Pabrai

Are foreign stocks better than Indian stocks?

The question whether foreign stocks are better than Indian stocks cannot be answered in the abstract. It depends on the facts and circumstances of each case.

Novice investors like me are certainly not qualified to express any opinion on the subject.

However, it is a fact that some people have a fancy for all things foreign in the belief that such things are superior to the desi stuff.

This fancy extends to stocks as well. Some investors believe that foreign stocks enjoy better corporate governance standards and that more hefty gains can be harvested from foreign stocks than by buying their Indian counterparts.

However, others point out that blue-chip stocks in developed countries are operating in saturated markets and can only provide sedate returns while their counterparts in developing countries are operating in untapped markets and can provide multibagger returns.

Performance of blue-chip foreign stocks in the portfolio of PPFAS Mutual Fund

The best way to evaluate the performance of the foreign stocks is to look at the portfolio of the PPFAS Mutual Fund.

The PPFAS Mutual Fund has as much as 27% of its AUM invested in foreign stocks. These are top-quality and blue-chip stocks.

The performance of the foreign stocks over a YoY, 5-year and 10-year period is as follows:

*From 18th June 2010

Prima facie, there is not much to be excited about. The CAGR over 10 years is 11.23%. The CAGR over a 5 year period is 9.99%. The YoY return is a loss.

Performance of Mohnish Pabrai’s Pabrai Funds Portfolio

Another credible way to evaluate the performance of the foreign stocks is to look at the latest portfolio of Pabrai Funds.

*From 17th July 2015
@From 5th Jan 2016

This performance is also quite sedate and does not send the pulses racing.

The performance of the S&P, Dow Jones and NASDAQ is as follows:

The performance of the Indian Indices is as follows:

Any advantage in scouting for stocks in foreign shores?

Based on the above data, the moot question to be asked is whether there is any merit in foraying into foreign stock markets in the quest for big bucks or whether one can make more bucks from Indian stocks.

Prima facie, to my untrained eye, it appears that more gains can be harvested from Indian stocks than from foreign stocks.

This may be the reason why foreign funds are making a beeline for Indian shores and pumping billions of dollars into Indian stocks.

How Indian investors can buy foreign stocks

Mohnish Pabrai has provided us with a definitive guide of the procedure to be adopted to buy foreign stocks.

How can Citizens/Residents of India invest in U.S. Equity Markets https://t.co/w6HTzKJa5o

— Mohnish Pabrai (@MohnishPabrai) November 4, 2016

(i) Upto $250,000 can be invested overseas:

The RBI has issued a notification permitting Indian citizens to invest up to $250,000 (Rs. 1.67 crore) in foreign stocks. A family of four can invest upto $1 million (Rs. 6.68 crore) in foreign stocks.

(ii) Open an account with a foreign broker:

Several brokerages based in the USA like Interactive Brokers, TD Ameritrade, Charles Schwab International Account permit Indian citizens residing in India to set up an account and buy U.S. stocks, mutual funds and ETFs.

No US mailing address is required to open an account.

(iii) Mohnish Pabrai’s favourite broker:

Mohnish has stated that Interactive Brokers is his favourite.

– Interactive Brokers has a specific account type that allows Indian Residents to trade overseas.

– To start an application click here.

– The application materials need to be sent via email to this address: newaccounts.in@interactivebrokers.com.

– Their customer service number in India is +91.22.6128.9888. The Director of Sales in India is Ankit Shah. His phone number is +91.22.6128.9836, and his email address is ashah@interactivebrokers.com.

Mohnish has emphasized that Interactive Brokers is one of his favorites because they permit investors to buy stocks across several global markets. Also, he calls their commissions “super low”.

Minimum monthly fee of $10

Mohnish clarified that Interactive Brokers charges $10 as a minimum monthly fee. This fee is waived if the value of the account is equal to or greater than $100,000. The fee is also waived for the first three months. So, if one’s account balance is expected to be less than $100,000, the other choices like Schwab or TD Ameritrade may work better, Mohnish advised.

What about income-taxes in the foreign country?

An aspect to keep in mind is that Indian investors may become liable to pay tax in foreign countries on the gains that they make on the foreign stocks. These gains will not be eligible for the long-term capital gains benefit that Indian stocks enjoy with the result that an investor would become liable to double tax subject to the right of set-off provided under the Indian Income-tax Act.

Alternate Method No. 1: Open an account with an Indian broker with a tie-up with a foreign broker

According to an article in Mint, several Indian brokers like Kotak Securities, ICICI-Direct, India Infoline, Reliance Money and Religare have tie-ups with their foreign counterparts and provide seamless trading facilities.

However, the downside is that there may be stiff account opening charges as well requirements for maintaining deposits/ margin moneys. Also, there may be a double whammy of brokerage which may wipe out the meager gains that one makes.

Alternate Method No. 2: Buy Indian Mutual Funds with global ETFs or equities

According to some experts, a simpler solution is to buy Indian mutual funds that invest in foreign equities or ETFs.

According to Fundsindia.com, there are as many as 72 International Funds operated by Indian Mutual Funds.

Surprisingly, the list does not include the famous Goldman Sachs Hang Seng Exchange Traded Scheme. This ETF invests in shares listed on the Hang Seng Index. Even the famous Motilal Oswal MOSt Shares NASDAQ 100 ETF is conspicuously absent from the list.

Best blue-chip foreign stocks to buy for 2017

No discussion about foreign stocks is complete unless we also get an idea of the best stocks to buy.

According to Louis Navellier of investorplace.com, the following are the top-10 blue-chip stocks to buy for 2017:

(1) Ingredion Inc – high dividend yield of 1.5% + reasonable valuation of 19x:

Ingredion Inc. (INGR) is in the business of developing ingredients and biomaterials that enhance a variety of products, including food, beverage, pharmaceuticals and even paper. Half of Ingredion’s business comes from food products companies that are looking to improve sweetness, taste and/or texture. Ingredion also offers options for companies that want to improve nutrition or simplify their ingredients. Ingredion employs 11,000 and serves customers in over 100 countries. Based in Westchester, Illinois, Ingredion is a predominantly domestic company; 60% of its sales come from North America.

(2) ULTA Salon – strong domestic retail play with 20.6% sales growth and 25.1% earnings growth:

ULTA Salon Cosmetics & Fragrance (ULTA) is a one-stop beauty shop. The store touts the prestige and mass selection of its 20,000+ cosmetic products. In addition, ULTA houses in-store salons, which offer a range of services as well as styling products from hair care to flat irons. ULTA sells its own brand of products but has also found success in retailing mega-brands like Clinique and Lancome, and has a strong customer base, boasting 15 million customer loyalty program members.

(3) Equifax Inc – multi-national company with a strong domestic presence and an excellent blend of growth and value:

Equifax Inc. (EFX) is one of the nation’s three major credit bureaus (joined by Experian and TransUnion). Equifax collects, organizes and analyzes data on more than 600 million consumers and 80 million businesses around the world. The company then uses this information to calculate credit scores; it generates a mind boggling 60,000 credit score updates per second. In turn, customers use this information to help them secure loans for houses, cars, education and more. Equifax has access to an incredible amount of financial data, so it also offers fraud detection and prevention services. Equifax provides customers with credit monitoring services as well as identity theft protection.

(4) J.M. Smucker – good blend of growth and value:

We all know J.M. Smucker Company (SJM) from its line of jam, jelly and fruit preserves, but what many don’t realize is that this 120-year-old confection giant is also responsible for Jif peanut butter, Pillsbury flour, Folgers coffee and even pet foods like Meow Mix and Milk Bone. Smuckers’ coffee brands and consumer foods brands each account for 29% of net sales, while its pet foods segment accounts for 13% of net sales.

(5) NVIDIA – a strong buy owing to excellent fundamentals and solid dividend:

NVIDIA Corp. (NVDA) is a leading computer graphics company, making graphic processing units (GPUs) for consumers and businesses. These GPUs enhance the processing capability of its users’ computers. The company has been in the computer graphics business for more than two decades—it invented the GPU in 1999—so it is a well-established player.

(6) Altria Group Inc – top stock with high dividend payout:

Altria Group Inc. (MO) is the largest tobacco company in the United States. Altria’s subsidiary Philip Morris USA controls over 50% of the U.S. cigarette market. The company’s most popular brand—Marlboro—has been the best-selling cigarette for four decades. Philip Morris USA also markets Parliament, Virginia Slims and L&M cigarettes. John Middleton, another Altria company, is a leading manufacturer of cigars and pipe tobacco. Then there is Altria’s U.S. smokeless tobacco business, which has a 55% market share in the U.S. Copenhagen and Skoal are two of the top smokeless tobacco brands in the U.S., each with retail sales exceeding $1 billion.

(7) American Water Works – earnings growth between 7% and 10% from 2016 through 2020 expected:

American Water Works (AWK) is the nation’s largest publicly-traded water and wastewater utility. In addition to providing services to the general public, American Water also builds and operates water and wastewater facilities for private clients, like military bases and the food and beverage industry. Lately, American Water has been working to grow its footprint. Most recently, its subsidiary Pennsylvania American Water announced plans to acquire the McKeesport, PA wastewater system for $195 million. This system serves 22,000 customers. In the past few months, the company has also acquired the Shorelands Water Company–which serves 11,000 customers in New Jersey–and the Ridgewood-Area Wastewater system in Kentucky.

(8) Constellation Brands Inc – Excellent stock as Ballast Point’s sales volume is expected to double:

Constellation Brands Inc. (STZ) is one of the leading wine, beer and spirits companies in the world. It is part of the S&P 500 Index and is a Fortune 1000 company. Constellation Brands is the top premium wine producer in the world, the top beer importer, and the number three beer company in the U.S. In total, STZ has more than 100 brands, sells its products in approximately 100 countries and operates 40 facilities around the world. I’m sure many of its brands are familiar names to you, such as Robert Mondavi wines, SVEDKA Vokda and Corona beers.

Looking ahead to the current fiscal year, Constellation Brands now expects adjusted earnings per share between $6.05 and $6.35 and 10% net sales growth. I expect it to do even better. Recently, Constellation Brands announced plans to buy Ballast Point Brewing & Spirits for $1 billion. Based in San Diego, Ballast Point Brewing is a craft brewer that has exploded in popularity lately. It currently sells its beer in 30 states and 10 countries, so there’s plenty of room for growth.

(9) Edwards Lifesciences – $5 billion market opportunity by 2021:

As the world’s largest creator of artificial heart valves, Edwards Lifesciences (EW) has already helped extend the lives of over 2 million patients worldwide. And recently, its shareholders received some excellent news: Edwards Lifesciences’ life-saving technologies will be impacting even more patients than ever before.

(10) Northrop Grumman Corp – an excellent long-term investment:

Northrop Grumman Corp. (NOC) is a major defense contractor, serving the U.S. and 25 other nations. Northrop Grumman brings in nearly $25 billion in annual sales through building aircraft carriers, tankers, strategic bombers as well as radar systems.

Twitter.com – Stock recommended by Shankar Sharma

It is worth recalling that Shankar Sharma delivered a talk a few days ago in which he not only revealed his five fail-proof mantras for finding multibagger stocks but also recommended Twitter.com as his favourite stock to buy for 2017.

Conclusion

We have to thank Mohnish Pabrai for this useful bit of information. The next time we are gripped with the irresistible urge to buy foreign stocks in preference to Indian stocks, we know where we have to go and what we have to do!