Is It Time to Invest in Cuba?

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Old classic car on the beach of Cuba

Cuba is one of the most fascinating places I’ve ever visited. I just returned from a week in Havana, where I, along with a group of Oxford Club Members, toured the city, met with financial, political and cultural leaders, and received an education on the business climate in Cuba.

And surprise - there is a business climate.

Since Raul Castro took control of the island nation, he has slowly loosened the government’s vise-like grip on some economic activity.

For example, Cubans are now allowed to open restaurants, called palladars. There are also over 100 different services or professions that Cubans are allowed to engage in as private entrepreneurs. (Under the latest law, a state-employed electrician may be allowed to do work on the side to earn extra money.)

As you can imagine, Cuba’s 11 million inhabitants would like to see restrictions lifted much more quickly. And despite these advances that were unthinkable a decade ago, the Cuban government still keeps the overwhelming majority of its citizens in poverty.

For example, a professor of architecture that we met makes $30 per month. A doctor with a specialty, such as a neurosurgeon, makes around $75 per month.

But things are opening up, little by little. And foreigners are eager to invest in Cuba because of the beauty of the country (as evidenced in my picture below), its well-educated population (all schooling is free) and enormous potential.

However, there are several hurdles that make it difficult to invest in Cuba.

  1. The Government - I am leery about investing in a country where the people in power have a history of nationalizing private businesses. Raul Castro is expected to step down in 2017, and a new leader will be “elected.” Even if the Cuban people are allowed to vote for a new head of state, it will still be a one-party election.
  2. Lack of Wholesalers - If you own a business, you buy your supplies from the government. There are no wholesalers competing for your business. This creates several problems. The government knows how much you’ve bought and can know how much you’re selling. Additionally, no one is competing for your business, so the chances of being able to lower your costs are slim to none.
  3. Lack of Service Culture- For many years it barely mattered whether Cubans showed up at their jobs or performed them competently. They would still receive their meager salaries. They had no incentive to work hard and satisfy customers. In the tourist industry, that is changing. The service in our hotel and most restaurants was quite good. But that wasn’t the case everywhere...In one restaurant, the server was clearly quite new. I was offered dessert choices of vanilla, chocolate or strawberry ice cream - or a brownie with ice cream. I asked for the brownie with strawberry ice cream and was told the brownie came with vanilla only. Despite what I thought was a stunningly logical argument, she wouldn’t budge on that directive.
  4. Nowhere to Put the Cash - To me, this is the biggest problem. Cuba is a cash economy. If you have a successful business, you’ve got wads of cash. But entrepreneurs don’t want to put the money in the bank. First of all, do you trust a Cuban bank to remain solvent? And even if it does, Fidel and Raul will know how much money you have. So prosperous businesspeople literally carry their cash out of the country in briefcases or on their person.
  5. A Cuban Partner - A foreign investor has to have a Cuban partner in a business. So you have to find someone you can trust. Many of the foreign business people that I met were married to Cubans.

Though Cuba has enormous potential, it’s early to invest unless you have infinite patience and can handle a lot of risk. The payoff in the long run could be huge. But you’ll have to wait. My guess is a decade or more. And you’ll likely have to endure a lot of setbacks, headaches and obstacles along the way.

However, I do encourage you to visit Cuba and see for yourself. It is one of the safest countries in the world and has wonderful people and great culture. Just don’t try to order a brownie with strawberry ice cream.

Good investing,

Marc

Have thoughts on this article? Leave a comment below.

Editorial Note: If you’re interested in traveling with The Oxford Club, we have several events scheduled for the coming year. (Including the 18th Annual Investment U Conference in picturesque Carlsbad, California...) For a full calendar of cruises, seminars and retreats, click here.

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Fulfill Your International Diversification With This Low-Risk Play

It may be too early to invest in Cuba, but it’s essential that you give your portfolio some international exposure from somewhere. One low-risk bet right now is Canada. To that end, we recommend you take a look at BCE Inc. (NYSE: BCE).

BCE is Canada's largest communications company. It offers broadband, television and wireless services to millions of businesses and consumers. Here's what Marc had to say when he recommended the stock back in November 2013:

“BCE operates in a growing industry. Although landlines are declining, no one is turning off their cellphone or Internet service anytime soon... Add all that to strong population growth and you get a stock with a great yield that should be even better for years to come.”

Today, that yield sits at a hefty 6%. And over the coming months and years, that number should increase. BCE's free cash flow and earnings are on the rise, thanks to the strength of its wireless and Internet businesses.

Management expects free cash flow to rise 8% to 15% next year. Also worth noting? Its policy is to pay out between 65% and 75% of free cash flow in the form of dividends.

- Alexander Moschina with Marc Lichtenfeld

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