Is It Time to Invest in Cuba?

In 1958, Cuba was an investment power. Their workers received the eighth highest salaries in the world, and the country’s per capita income exceeded that of Austria and Japan. It was such a popular expat destination that more Americans lived there than Cubans in America. The golden age passed, however, when Fidel took power, and it wasn’t until President Obama lifted sanctions on the island nation that investors became interested in Cuba’s potential.

The trade embargo

Before Fidel Castro came to power, Cuba was a popular tourist destination for Americans. The original purpose of the trade embargo was to get rid of Fidel Castro, but that didn’t happen. Instead, Cuba implemented socialist policies. In December 2014, 80-85% of the economy was controlled by the government.

In 2014, former United States President Barack Obama took steps to ease (not eliminate) the US trade embargo with Cuba.However, three years later, then-President Donald Trump re-enacted tougher embargo measures, seeking to stamp out Obama’s “open door” policy. President Trump’s plan was to cut U.S. aid to Cuban companies funneling money to the military, but that has worried investors about the overall effect the tightening will have on Cuba’s trajectory.

According to the Peterson Institute of International Economics, US exports to Cuba ranged from $330 million to $510 million in the five years to June 2015. In 2017, exports totaled more than $291 million.If the trade embargo were to be lifted, this figure could rise to $4.3 billion. However, as noted above, there are headwinds in the political and military landscape.

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Other Complications

Venezuela is one of Cuba’s largest oil suppliers. As oil prices fall, Venezuela finds itself in a delicate situation. Another factor is demography. There’s a reason China and the United States are the strongest economies in the world: they have the most consumers. It goes deeper than that, of course, but population is an important factor.

To put things into perspective, when it comes to emerging markets, China has 1.43 billion people in 2020; Cuba has only 11.32 million people, and it’s safe to say there’s a shortage of disposable income. At the same time, if Cuba experiences a cultural resurgence like it did in the 1950s, then there would be ample opportunity to enter the ground floor.

Invest in Cuba

What you’ve probably read the most about the Herzfeld Fund for the Caribbean Basin (CUBA), composed of approximately 44 securities of non-Cuban companies with exposure to growth in Cuba. It’s a closed-end funds. Therefore, there is a fixed number of shares.This limited supply can lead to parabolic movements in the price per share as demand increases. You may have missed a big step in 2016 when news broke of Fidel Castro’s death, but that doesn’t mean CUBA will be coming the other way soon.

In October 2020, the Herzfeld fund was trading at a low of $3.82 and was trending lower due to the COVID-19 pandemic. For some, they would view the long price decline as an opportunity to buy long-term, collecting dividend payouts along the way. 

Still, with the recent policy shift, there may be more upside potential than downside risk. It’s up to you, but you need more information before making that decision. The largest assets for the Herzfeld Caribbean Basin Fund are:

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  • MasTec inc. (MTZ)
  • Popular, Inc. (BPOP)
  • Royal Caribbean Cruises Ltd. (RC8.SG)
  • NextEra Energy, Inc. (NEE)
  • First BanCorp. (FBPRO)

All of the above businesses stand to benefit from the removal of the trade embargo, whether due to increased tourism, consumption, agriculture or construction. Of course, you can invest in these companies in one place using the Herzfeld Caribbean Basin Fund, but you can also invest selectively. If so, let’s look at some keys metric.

The essential

If you choose to invest, it may make sense to limit exposure. Cuba’s significant risks, not to mention the policies involved, make Cuban investing speculative at best. If you’re right, you’re making some money that has the potential to accumulate over the long term with the help of dividend payments, but there seem to be smarter emerging markets as of October 2020.