With global investors hungry for yields, the topic of Emerging Markets has popped up recently. Fueling this desire are the headlines of Cuba potentially opening up to international investment following US President Barrack Obama stating he will remove the South American country from a terrorist list, opening up the door for removing the trade embargo that has crippled the country over the last 50 years.
The Government run economy of Cuba was once a dynamic and prosperous country. In the 1950’s, it was the playground for the American elite. But the Cuban Revolution in 1959, led by Fidel Castro changed that. Where Cuba was once the most advanced and successful Latin American economy, it became one of the most impoverished.
A country stuck in time
Following the revolution, the Cold War between America and the USSR saw trade embargos placed on the country. This has had the effect of limiting international trade. In fact, the architecture, infrastructure and even motor vehicles are like stepping back into the 1950’s.
Situated a mere 150km off the Florida coastline in the Caribbean, and 210km east of Mexico, it is the largest island in the Caribbean and has more than 11million citizens.
With an economy that has been caught in a time capsule for more than 50 years, many investors are starting to wonder if there will be investment opportunities in Cuba. If not, at the very least, in US listed companies that will do business there.
Just like the developmental change China has experienced and the expected change that India could potentially undergo in the coming decades, there is an expectation that Cuba will experience a massive change from low socioeconomic to middle class in a short period of time.
How do we make money from Cuba opening up to the world?
My first port of call in researching potential investment opportunities was to evaluate what Exchange Traded Funds (ETF) might be available. The country is still a Communist regime, even though it is slowly shifting (as did China) towards allowing more personal enterprise and foreign investment.
There is an ETF listed in the US with the code CUBA – the Herzfeld Caribbean Basin Fund. I had high hopes this might provide exposure to companies operating in the country. However, this ETF is actually managed with the view to investing in companies that “are likely” to benefit from economic, political, structural and technological developments in the countries in the Caribbean Basin (Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia and Venezuela).
Basically, there is not an ETF that provides exposure to Cuban companies (which are mostly stated owned anyway).
Alternative potential for future investment
But as so many other articles have stated recently, opportunity to invest in Cuba is most likely to come from indirect exposure. In particular, Construction companies that start to win contracts with the government, Tourism related companies such as Hotels which will benefit from the increase in trade, along with which ever airlines start adding routes to the country.
Much of Cuba’s future will be based around Tourism, Construction and Agriculture. With a direct need to upgrade infrastructure and technology, the likes of Caterpillar and John Deere for example, could provide a boost in stock prices, albeit proportional to their global operations.
Further down the line, as the lower class start to shift towards middle class, the sale of white goods and Utility services mean companies such as Whirlpool or Fisher & Paykel could increase sales. The Internet will revolutionize the country, so Apple and Samsung will no doubt also see millions of sales of their products in coming years.
Opportunity is there, but the time might not be now
It took China more than 50 years to transition from a pure Communist state to a Communist run Open Economy. And that is with a population of more than 1.35 billion people compared to a mere 11 million.
We have no doubt that there is opportunity in Cuba’s economy as it joins the field of Emerging Economies. However, those opportunities may come in the form of an ETF that we are yet to see float, or indirectly in companies that win contracts in any of the above fields.
In the meantime, we will keep this investment idea in the forefront of our minds, watching the headlines in preparation of gaining exposure. Vas bien, Fidel = You’re doing fine, Fidel!
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