Cuba Fund Surges on Hopes Castro's Death Will Improve U.S. Relationship

  • Herzfeld Caribbean Basin Fund allows investors to bet on Cuba
  • Investors speculating Trump may now take friendlier tone

What Fidel Castro's Death Means for Cuba and the West

One of the few instruments through which U.S. investors can bet on an opening of the Cuban economy surged amid speculation that Fidel Castro’s death may pave the way for improved relations between the U.S. and the communist country.

The $43 million Herzfeld Caribbean Basin Fund, which holds stock in airlines, cruise lines, builders and other companies that could gain if the U.S. lifts trade restrictions, jumped as much as 17 percent. It was the biggest gain since December 2014, when Barack Obama pledged to end a diplomatic embargo that lasted more than 50 years.

Investors’ optimism seemed to clash with statements from Donald Trump, who said Monday that he may “terminate” the Obama administration’s reopening of U.S. relations with Cuba unless the island nation takes unspecified steps to make improvements for its people. Still, stock buyers are betting that there’s room for Trump to take a friendlier stance and for Cuba to make concessions, according to Stuart Culverhouse, an analyst at Exotix Ltd. in London, a research firm and investment bank that specializes in so-called frontier markets.

"There are growing interests to maintain the relations even among Republicans," Culverhouse said.

For more on U.S.-Cuba relations, click here for a QuickTake

Obama restored diplomatic relations with Cuba in December 2014 and began easing restrictions on trade with the nation, allowing import of cigars to the U.S. and U.S. airline flights and docking of cruise ships. He visited the country in March.

Trump’s latest comments on Cuba didn’t show a thaw in relations was imminent.

"If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal," Trump said on Twitter.

Jaime Reusche, a senior sovereign analyst with Moody’s Investors Service, said Castro’s death probably won’t change much for the country’s relations with the U.S.

“It might soften some of the hardliners on reforms to move forward, but it is unlikely to lead to quick changes,” he said. “At best, it’ll be very slow progress building on what we’ve seen under the Obama administration.”

Still, some think that the death of Castro could pressure the Cuban government to work on improving relations with the U.S., according to Thomas Herzfeld, the founder and chairman of an investment firm that bears his name and operates the Cuba fund.

"If the Cuban government makes a move toward democracy and political freedom and releases political prisoners, for example, I think that is what the United States would like to see before resuming full trade," he said.

The Cuba fund rose 10 percent to $7.02 as of 11:03 a.m. in New York.

While the fund rallied, many of the stocks that make up its biggest holdings actually fell:
*MasTec Inc. -0.4%
*Copa Holdings SA -2.5%
*Royal Caribbean Cruises Ltd. -1.7%
*Lennar Corp. -1.6%
*Norwegian Cruise Line Holdings -1.6%

Investors with appetite for the riskiest securities have also purchased defaulted debt from Cuba in recent years, hoping the nation will eventually have to pay up to gain access to international bond markets. Since the end of 2014, trading has picked up and is averaging about $52 million a quarter. In the four years prior to that, the average was just $13 million a quarter -- equal to about $200,000 per day, according to data compiled by EMTA.

In total, Cuba’s external government debt is about $24 billion, according to estimates by Moody’s.

Calls to Cuba’s Ministry of Foreign Trade and Investment weren’t returned.

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