4th November 2020

Investing in Cannabis

Until very recently, big fund managers generally ignored cannabis investments. Earlier this year, investment bank Jefferies said institutions accounted for a meagre 5% of the ownership of cannabis companies, compared to 50% in the technology sector. The weed market is still relatively young, and therefore highly volatile. Cannabis stocks have lost about a quarter of their value in the first half of 2020, compounding a 50% drop in 2019.

But as an increasing number of countries and states move to legalise and regulate the purchase, production and cultivation of cannabis, the market shows clear potential. Experts predict that by 2022, the marijuana market will reach $32 billion. COVID-19 may have knocked legalisation off the agenda temporarily but the recent market surge in cannabis and its derivatives are promising.

In 2018, the global medical cannabis market was worth $13.4 billion and there are more companies entering national and international stock exchanges all the time.

The markets

There are two primary cannabis markets. Firstly, medical cannabis is for patients who use cannabis or its derivatives to treat health conditions. Meanwhile, recreational cannabis is for customers who use marijuana or cannabis extracts for enjoyment.

Medical cannabis is far more commonly legalised than recreational cannabis. For example, in the U.S., cannabis remains illegal at the federal level, but a growing number of states have legalised both.

A company’s geographical location is key in determining its growth prospects.

The pioneer

Canada’s pioneering cannabis legalisation may have helped kickstart a financial revolution in the stock market with the launch of a diverse portfolio of marijuana stocks but investors now fear modest returns thanks to excessive regulation and supply chain bottlenecks.

But the outlook remains positive - in July, sales at Canada's pot shops increased 15% from June, according to government data released in September.

The powerhouse

There are at least 10 cannabis companies in North America with billion-dollar market capitalisations with cannabis dispensaries designated as essential businesses, the cannabis market has reported strong sales throughout the pandemic. According to the Oregon Liquor Control Commission, $84.5 millions of marijuana products were sold in Oregon in March alone!

As states like Arizona and South Dakota potentially move to legalise, the U.S. cannabis market will provide new opportunities for investors and serious competition to its Canadian counterpart.

The potential

In November 2018, the UK government legalised cannabis for medical use, requiring a prescription from specialist practitioners in what seemed like a move towards further freeing up regulations in the future. However, due to restrictions put in place around the reforms, less than 200 people have been able to access CBD treatment but that is set to change. According to the Centre for Medicinal Cannabis, the UK medicinal cannabis market is predicted to be worth £1.03billion, servicing nearly 340 000 patients.

From Sativa to Greencare Capital, the UK has nevertheless seen a handful of companies listing on its public markets with cannabis as their core business. But in early 2020, the London Stock Exchange announced that a new thematic exchange-traded fund (ETF) had been launched, focusing on medicinal cannabis.

This new ETF tracks the Medical Cannabis and Wellness Equity Index (CBDX), provided by Solactive, a Germany-based company that designs, calculates, and licenses financial indices. The CBDX ETF consists of publicly listed companies conducting legal business activities in the medical cannabis, hemp and CBD industry, including producers and suppliers of medical cannabis, CBD-focused biotech companies, and companies leasing property to medical cannabis growers, and software solutions for medical cannabis producers.

Picking up after the pandemic

The development of funds such as the ETF and record sales even during the lockdown suggest that the global medical cannabis sector may be in for a rebound after a slump over the past few months.