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    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.
    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.”


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