Cuba’s Investing Opportunities

Cuba's Investing Opportunities
Food, telecommunications, and tourism are likely to flourish as Cuba
shows signs it will embrace change. Needed: data transparency and
currency unification.
By DIMITRA DEFOTIS
Updated July 18, 2015 1:10 a.m. ET
Emerging Markets

With the stars and stripes about to be hoisted over the U.S. embassy in
Havana for the first time in five decades, investing opportunities loom
large. Change may not be fast, but it could be furious. Cuba's communist
government has allowed more entrepreneurs to open small businesses, but
when it looks like Cubans are getting comfortable with the outside
world—homespun movie theaters, for instance—the government throttles
back. Internet and telecom are far behind, and property rights are
limited. Cuba remains one of the most closed economies in the world.

But the government is showing signs it will embrace change to promote
growth. Last week it said gross domestic product grew 4.7% in the first
half of 2015, year on year, ahead of estimates, after rising 1.3% in
2014. But government data are unreliable. What's needed to attract
investors, says Jason Marczak, deputy director of the Adrienne Arsht
Latin America Center at the Atlantic Council, are data transparency and
unification of a two-currency system with a peso for Cubans and a
convertible peso, or CUC, for foreigners. The latter trades at a 13%
discount to the dollar, including fees.

CUBA'S GDP IS ROUGHLY $77 BILLION—not large but nothing to sneeze
at–with a population exceeding 11 million. In 2013, exports, including
sugar, tobacco, coffee, and nickel, totaled an estimated $6 billion,
while imports totaled more than $13 billion, with food, oil, machinery,
and chemicals from Venezuela and China topping the list—according to a
U.K. entity promoting Cuba trade and investment.

With the fall in oil prices below $60 per barrel, Cuban trade partner
Venezuela needs more than Cuban doctors to meet its debt obligations.
Cuba is motivated to diversify its trade partners. Brazil was the lead
investor in a $900 million expansion of the Mariel port and industrial
zone. Mariel is managed by Ports of Singapore, and is "the biggest of
its kind in Cuba and one of the largest in the Caribbean today," the
U.K. Cuba Initiative notes.

U.S. Agriculture Secretary Tom Vilsack has said food is a $1.7 billion
opportunity for U.S. companies because Cuba imports about 80% of its
food. But, the U.S. must chip away at its trade embargo against Cuba.
Cargill, the private U.S. agriculture company, has pushed for expanded
Cuban trade. Food will be a key to keeping Cubans happy during this
transition: Cuba travelers tell me shelves are full at government
groceries, but emptier at private stores.

The closed-end Herzfeld Caribbean Basin Fund (ticker: CUBA), which
invests across Latin America, saw a huge spike after last December's
U.S.-Cuba détente. But the fund is up 24% over 12 months with big bets
on Cuban tourism, including Latin American airline operator Copa
Holdings (CPA) and Royal Caribbean Cruises (RCL). The fund trades at a
35% premium to its net asset value. That's a rich valuation considering
Cuba may mean little to underlying earnings, and the fund had a 10% cash
position as of March 31. Fund manager Tom Herzfeld, ("Investing in Cuba:
Tom Herzfeld Sizes Up the Prospects," Feb. 23, 2015), declined to speak
because his fund is in a quiet period. But the top holding,
Florida-based MasTec (MTZ), points to a big bet on infrastructure in
communications, electrical transmission, oil and gas, and other industries.

"It is difficult to have a clear timeline," Marczak says. "Things have
been changing for three years…Agriculture, telecommunications, and
tourism are likely to flourish first."

E-mail: dimitra.defotis@barrons.com

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