November 8, 2001

Cuba could be next emerging markets hotspot

By Alison Beard in New York. Financial Times. Published: November 7 2001 20:06

After getting their fill of China, Vietnam and the former Soviet countries, US emerging markets investors will start searching for a new frontier.

One option, Cuba, is in their own backyard. But because of an embargo enacted in 1960 and the more recent Helms-Burton act that further limits foreign companies in Cuba, few Americans think they can gain access to the island or its businesses.

In fact, they may already be investors. AlCan, a Canadian aluminium company with some operations in Cuba, has a shareholder base that is 10 per cent American, as does Switzerland's Nestle, which has a bottled water venture in Cuba. Leisure Canada, a company with three resort projects under development in Cuba, is 30 per cent held by Robertson Stephens and other California investment firms.

"US investors are not permitted to have direct investment in a Cuban company, but the operative word is direct," said John Kavulich, president of US-Cuba Trade and Economic Council.

Americans cannot invest in Cuba's leading businesses, which are government-operated, nor can they "officially give $10,000 to a gentleman who is registered as self-employed and running his own restaurant", Mr Kavulich said. "You can invest in a third-country company that has investments in Cuba provided the majority of the company's revenue does not come from Cuba and [provided] you have a non-controlling interest in the company".

Leisure Canada, for example, is able to have US investors because its resorts are not expected to generate revenues until 2005. Other companies, such as AlCan and Nestle, simply keep their Cuban operations small.

Foreigners have set up over 400 joint ventures with government-operated bodies, 15 of which were established from January to October, according to Cuba's ministry for foreign investment and economic cooperation.

Of the 4,500 companies doing business in Cuba, Mr Kavulich counts only two that have been sanctioned under the Helms-Burton act, which punishes companies that use assets seized from Americans by Fidel Castro, Cuba's president. The chief executive of Sherritt International, for example, a company that has a 50-50 nickel-mining partnership with the Cuban government, is prohibited from travelling to the US.

"Companies look at the opportunities today in Cuba as laying a foundation for the future" when the 75-year-old Mr Castro dies, a more progressive government replaces him and the US lifts its embargo, Mr Kavulich said.

"Those that believe Cuba will be a mirror image of the US are deeply misinformed, but . . . economic realities, rather than politics, will play a far greater role in decisions made by a post-Castro government."

Louis Sola, president of Berkshire Financial Services, agrees. The country has "serious inefficiencies caused by long-standing central planning, outdated and inappropriate technology and poorly motivated workers", he acknowledges in his book, Cuban Capitalism.

But "it is the largest and most populous island in the Caribbean; it has a highly educated workforce; its beaches are unspoiled; the country holds one of the world's largest nickel reserves; it has highly valued real estate properties and securities; and the nation benefits from an extensive industrial infrastructure."

The tourism sector may be the biggest area for growth, and the best opportunity for US investors. The number of visitors to Cuba increases by 20 to 30 per cent each year, even though US airlines can only run charter flights to the country. Leisure Canada, which is planning golf courses and timeshare communities, expects to be profitable even if the US embargo stays in place.

But "obviously any company in the tourism sector will do well if Cuba opens up," said JJ Jennex, investor relations director. "PricewaterhouseCooper estimates that 6m Americans would visit in the first year."

Oil, communications and consumer products businesses are also being considered. US-listed foreign companies that have ventured to Cuba include Petrobras of Brazil, Repsol of Spain and ING of the Netherlands, all of which have American Depositary Receipts.

US investors also have the option of a Cuba-focused mutual fund. The Herzfeld Caribbean Basin Fund cannot invest directly in Cuba, but it buys shares in Latin American and US companies that stand to benefit from a lifted embargo. These include Florida East Coast Industries, a trucking, rail and real estate company and Carnival and Royal Carribean, the cruise lines.

Other holdings include WorldCom and AT&T Latin America, which provide telephone services to Cuba; Coca-Cola Femsa, the beverage company's Mexican subsidiary; and some Cuban government bonds.

The closed-end fund, which launched in 1994 and uses the ticker symbol CUBA, has underperformed its category for the last two years, as well as trading at a discount to net asset value, according to fund tracker Morningstar. This year, its performance is 6 per cent better than average but that still translates to a loss of 20 per cent to $3.89 per share.

Its market value is down 17 per cent to $3.40 per share. Of course, any thawing in US policy towards Cuba would give an immediate boost to those shares.


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