In 1958, Cuba was an investment powerhouse. Their workers were paid the eighth highest wages in the world, and the country's per-capita income exceeded that of Austria and Japan. It was such a hot expat destination that more Americans lived there than Cubans in America. The golden days passed, however, when Fidel seized power, and it wasn't until President Obama lifted sanctions against the island nation that investors became interested in Cuba's potential.
The Trade Embargo
Prior to Fidel Castro coming to power, Cuba was a popular tourist destination for Americans. The original goal of the trade embargo was to get rid of Fidel Castro, but that didn’t happen. Instead, Cuba implemented socialist policies. In Dec. 2014, 80%-85% of the economy was controlled by the government.
In 2014, former President of the United States Barack Obama initiated measures to ease (not eliminate) the U.S. trade embargo with Cuba. This could lead to the trade embargo being eliminated in the future. If that happened, we would have a new emerging market on our hands. However three years later, President Donald Trump re-enacted steeper embargo measures, seeking to eradicate the "open door" policy of Obama. President Trump's plan was to cut U.S. aid to Cuban companies that funneled money into the military, but it has investors worried about the overall effect the tightening will have on Cuba's trajectory. (For more, see: Sanctions Between Countries Pack a Bigger Punch than You Think.)
According to Peterson Institute of International Economics, U.S. exports to Cuba ranged from $330 million to $510 million over the five years preceding June 2015. In 2017, exports totaled more than $291 million. If the trade embargo were to be eliminated, that number could increase to as high as $4.3 billion. However, as stated above, there are headwinds in both the political and military landscape.
Venezuela is one of the largest suppliers of Cuba’s oil. With the slide in oil and Venezuela finds itself in a delicate situation. Another factor is demographics. There’s a reason why 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 a big factor. To put things in perspective, when it comes to emerging markets, China has a 2020 population of 1.43 billion; Cuba has just 11.32 million people, and it would be safe to say that there's a dearth of disposable income. At the same time, if Cuba experiences a cultural resurgence as it did in the 1950s, then there would be ample opportunity to get in on the ground floor.
Investing in Cuba
What you have likely read about most is the Herzfeld Caribbean Basin Fund (CUBA), which is comprised of about 44 securities of non-Cuban companies that have exposure to growth in Cuba. It’s a closed-end fund. Therefore, there’s a fixed number of shares. This limited supply can lead to parabolic price-per-share moves when demand increases. You might have missed a big move in 2016 when news broke of Fidel Castro's death, but that doesn’t mean CUBA will soon head back in the other direction.
As of Oct. 10, 2020, the Herzfeld Fund is trading at a low of $3.82 and has been experiencing a downward trend due to the COVID-19 pandemic. For some, they would consider the long slide in price as an opportunity to buy long, collecting dividend distributions along the way.
Still, with the recent policy change, there might be more upside potential than downside risk. That’s for you to decide, but you need more information prior to making that decision. The largest holdings for Herzfeld Caribbean Basin Fund are:
- MasTec Inc. (MTZ)
- Popular, Inc. (BPOP)
- Royal Caribbean Cruises Ltd. (RC8.SG)
- NextEra Energy, Inc. (NEE)
- First BanCorp. (FBPRO)
All of the above companies stand to benefit from the elimination of the trade embargo, whether due to increased tourism, consumer consumption, agriculture, or construction. Of course, you can invest in these companies all in one place by using Herzfeld Caribbean Basin Fund, but you can also invest on a pick-and-choose basis. If the latter is the case, then let’s look at some key metrics.
The Bottom Line
If you do choose to invest, it might be wise to limit exposure. Cuba's significant risks, not to mention President Trump's proclivity for snap-decision sanctions, make Cuban investment speculative at best. If you’re correct, you make a little money that has the potential to compound on itself over the long haul with the aid of dividend payments, but there appear to be smarter emerging market plays as of Oct. 2020.