On Thursday 7 June, a vote is being held in Canada’s Senate that is likely to see cannabis legalised for recreational use across the country. But the sector remains a risky investment.
Legal marijuana could be in the “shops” in Canada by August this year. This follows decriminalisation by a number of US states and there are now a wide range of companies exposed to the sector listed on global markets. Is this one trend that investors should climb aboard?
Dr Avtar Dhillon, chair of the Canada Cannabis Council, certainly thinks so. He has described legalised marijuana as “one of the greatest opportunities in the world at this point and in the foreseeable future.” However, you would expect an industry body to say just that. Nevertheless, independent research suggests there could be at least a grain of truth in Dr Dhillon’s statement, with Canada's total legalised market potentially worth as much as $22.6bn (£16.9bn) a year, according to Deloitte. The consulting group thinks the industry could initially be worth $5bn a year to growers, product makers, testing labs and the country’s security industry.
Canada isn’t even the largest market in the world. That title goes to California, which started selling cannabis for recreational use in December 2017. So far, nine states and Washington DC have legalised marijuana for personal use for adults over the age of 21. Medical marijuana is legal in another 29 states and this decriminalisation trend is likely to continue, as a Gallup poll in 2017 showed that 64% of Americans were in favour of legalisation including a majority of self-defining Republicans.
Private investors have, obviously, taken note. The second-most researched investment fund on etf.com in the year to date is the “Alternative Harvest” fund, which trades under the symbol MJ. This marijuana-focused exchange-traded fund (ETF) was only second to QQQ, the technology-heavy fund. Of course, this fund’s popularity can be partly explained by the fact it is the only listed ETF in the US that targets investment in the marijuana space. Also, the US is not Canada, and a degree of political risk remains.
Jeff Sessions, the US Attorney General, has made his opposition to a legalised cannabis industry particularly clear. Marijuana remains illegal from a Federal point of view and, in January, Mr Sessions rescinded the Cole Memo, a document that was signed in the Obama era. This memorandum said that, given limited resources, the Justice Department would not enforce federal marijuana prohibition in states that legalised cannabis in some form, as long as strong and effective regulatory and enforcement systems were put in place to control its cultivation, distribution and sale. However, the Federal government reserved the right to interfere should a state’s actions contradict Federal priorities.
Of course, whether Mr Sessions continues his campaign against the cannabis industry will depend on the attitude of Donald Trump. The US president was fairly neutral on the subject during the election campaign and it is believed that the president has reined in Mr Sessions somewhat. This is possibly down to pressure from others inside the Republican Party. Indeed, former Republican House speaker John Boehner has actually been appointed to the board of Acreage Holdings, a large marijuana cultivation business with dispensaries in states where the product has been decriminalised. Mr Boehner thinks that “the time has come for serious consideration of a shift in federal marijuana policy.” But the political situation in the US remains unclear – with the president’s views remaining ambiguous. This means there remains a risk overhang for investors in the US industry, should the Federal government take action.
There has also been disappointment for investors in Canada. Marijuana stocks listed in the country rallied between October 2017 and January this year as investors positioned themselves ahead of the expected legalisation. However, there were delays to the new statute and the government proposed stringent packaging and distribution rules, limited product choices and a high cost for the product, which sent the sector off the boil. So far this year, the Canadian-listed Horizons Marijuana Life Sciences ETF is down by 11.7%. Horizons also recently launched an emerging marijuana growers ETF. There is also the fact that sales could initially be lower than expected, as the new market may see product shortages. Some provinces may also introduce tighter regulations than others and there could be slow conversion of users from the illegal to the legal market.
The legal market may ultimately be limited to a handful of US states and Canada. There is no sign yet of decriminalisation becoming a major global trend, although there are many arguments to suggest it could. Earlier this month, the TaxPayers’ Alliance issued a paper in favour of legalisation in Britain. It calculated that the legalisation of cannabis in the UK could save almost £900m a year in police, court and NHS costs. This figure does not include the significant revenues that could be raised from the taxation of any regulated businesses that would develop should the law be changed. Of course, cannabis remains illegal in the UK and it is likely to remain so for quite some time. No major political party is seriously proposing changing the law and other countries are likely to be extremely cautious too. Investments in the industry must therefore be regarded as extremely speculative.
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