How to Make a Profit in Unexpected Places

Could Cuba be the next offshore destination?

When it comes to real estate, my timing has been excellent … even though I didn’t know it at the time.

For example, my home in the U.S. is worth double what I paid for it only three years ago. I bought it for a song at the bottom of the housing trough. Since then the area where we live has become one of the trendiest in the South, and demand for single-family dwellings is sky-high.

But my really big score was by going offshore to South Africa. A year or so after the end of apartheid, I acquired an old farm cottage in a seaside suburb of Cape Town. The country had been under international sanctions for years, and its future was uncertain. The flood of foreign and domestic investments after sanctions were lifted spurred a boom, however, and my little cottage is now worth more than 10 times what I paid for it. The rental income is substantial, even in dollar terms.

My experience holds an important lesson: There may be similar profits to be made in the near future, in one of the most unexpected places offshore

Profiting From Geopolitics

We tend to view offshore markets through the lens of the normal cycle of expansion, growth, maturity and stability. China is a case in point. As my colleague Jeff Opdyke writes, the growth of that country’s consumer market guarantees high rates of return in select industries.

Sometimes, however, that long-term process is compressed because of “geopolitics.” Countries excluded from global markets for political reasons are suddenly welcomed back with open arms. That’s what happened in South Africa, as old regimes collapsed and the West showered economic favors on the new ones. It’s what explains the fantastic return on my offshore investment in Cape Town.

Myanmar (formerly known as Burma) is a current example. Jeff shows that the end of the decades-long military dictatorship there means pent-up demand for everything — consumer and investment goods and services — will explode, producing spectacular profits for those who get in now. On top of that, both the U.S. and China are pouring in investments as they vie for influence over Myanmar’s new government. The same thing happened in Vietnam, Panama after Noriega, and Eastern Europe and Russia after the fall of communism.

Now it’s poised to happen right next door … in Cuba.

Sanctions Don’t Work…

When Fidel Castro’s ragtag army occupied Havana on January 1, 1959, after dictator Fulgencio Batista fled in the night, the U.S. government was wary, but not opposed. When Castro’s government nationalized plantations and businesses in 1960, however — including those owned by U.S. citizens — President Eisenhower suspended relations and imposed an embargo on the island.

These sanctions, the longest-lasting foreign policy in American history, are still technically in force. The U.S. embargo put Cuba into economic suspended animation. A beautiful and productive island nation right next to the world’s most powerful economy was shut out of the U.S. economic orbit. Instead, Cuba relied on an increasingly decrepit Soviet Union, a smattering of European and Canadian tourists, and periodic alliances with other Latin American regimes, such as Hugo Chavez’s Venezuela.

But Castro did things that set his regime apart from similarly isolated countries, like North Korea. He poured scarce resources into education and health care. Cuba spends 10% of GNP on education, twice as much as its neighbors. Cuba’s population scores in the top levels globally for educational attainment. And despite spending about $250 per person per year on health care, Cuba’s population is one of the healthiest on the planet. Life expectancy is higher than in the U.S.

And there’s all that land … beaches, farms, mountains, and unique urban environments frozen in mid-20th century.

But Profits Do

My point isn’t to apologize for Castro. He’s a dictator and Cubans aren’t a free people. And yet the Castro brothers still rule, despite the embargo … perhaps even because of it.

But I predict it’s only a matter of time before the crack in the embargo engineered by the Obama administration will turn into a wide-open breach. Through that breach will pour people, ideas, and above all, money. Cuba may not become a beacon of freedom and an offshore haven right away, but things will change. Money has a way of doing that.

When I first visited Ho Chi Minh City (Saigon) a few years back, I was astounded at what I saw. A country that had been pounded by more high explosives than all those used in World War II in order to defeat communism was thriving. On the way into town from the airport I saw storefronts for Gucci, Tiffany’s, Ralph Lauren, Prada and Hermes. Somebody was making a lot of money.

Somebody, I predict, is going to make a lot of money by going offshore to Cuba … and sooner than any of us think.

Kind regards,
Ted Baumann Sovereign Investor
Ted Baumann
Offshore and Asset Protection Editor