A thaw in five decades of icy relations between the United States and Cuba is quickly leading to speculation about exotic vacation travel and remarkable cigars, but the ultimate investment potential is seen as limited at best.
“I'd estimate the investment potential for the U.S. to be about zero,” said Bob Johnson, director of economic analysis at Morningstar Inc.
“Some individuals might get rich, but it's just not the type of thing where it's big enough to move the needle for the United States,” he added. “Cuba is such a small economy; it could double in size and it still wouldn't mean anything to the U.S.”
With just 11 million people and a $121 billion economy, Cuba is considered more politically significant than economically significant, even as President Barack Obama announced on Wednesday
plans to restore diplomatic relations with the Caribbean country.
“I think of Cuba as being like a calmer Haiti that's about to have an economic Renaissance, but it's still just a tiny dot,” said Paul Schatz, president of Heritage Capital.
He added that efforts to re-establish diplomatic relations between Cuba and the United States, which were initially cut off in January 1961, could mean more business for popular cruise lines, major hotel developments and some airlines, but he isn't seeing any direct investment opportunities at this point.
“There probably isn't any way to invest in companies inside of Cuba,” Mr. Schatz said. “And there's probably not a pure play at this point. But sooner or later, somebody will come out with a Cuba ETF.”
Until that point, investors eager for the sense of getting in on the ground floor will have to settle for the suddenly popular closed-end fund Herzfeld Caribbean Basin closed-end fund (CUBA),
which saw a burst of activity on the news Wednesday.
“There are lots of kinks to work out before there will be any real investment opportunities in Cuba, and
serious things still have to happen in order to normalize relations with the United States,” said John Krey, an analyst at S&P Capital IQ.
“It is very long-term and you shouldn't get into it now,” he added. “There's nothing to invest in at this point because it's a communist country with a command economy, and there are no companies.”
Along with a likely expansion in tourism, there could eventually be some infrastructure development benefiting global service providers like AT&T Inc. (T) and Verizon Communications Inc. (VZ), said Michael Hodel, a Morningstar equity strategist.
“I would emphasize that the opportunity is likely to be very small in relative terms,” he said, pointing out that AT&T's annual revenues of $130 billion is greater than Cuba's entire economy.
“A global telecom company might look to provide services to business or government customers in major Cuban cities to connect to points in the U.S. and/or the broader global Internet, but the revenue opportunity is likely very small,” Mr. Hodel added. “I would expect that a cable connecting the U.S. to Cuba would cost somewhere in the tens of millions of dollars, which is a tiny investment for the U.S. telecom industry.”
In the meantime, it is all about lifting the veil on a country that has remained so close and so far away, according to Mr. Schatz.
“There might be a wave of opportunity when [Cuban president] Raul Castro relinquishes control or dies,” he added. “But until that point, there is the mystique because unless you were on a religious mission trip, most people haven't seen Cuba in 50 years.”
