Medical Cannabis Monthly Report | May

Medical Cannabis ETF Monthly Report: Key Takeaways

The much-anticipated Cannabis Administration and Opportunity Act (CAOA) which was scheduled to be introduced in April by Senate majority leader Chuck Schumer is met with further delays. Schumer has indicated that the Bill should be ready before the August congressional recess in order to build some cannabis related momentum into the midterms. Separately, Schumer also made an appearance at a cannabis legalization rally in New York City and indicated buy-in from at least six Republicans. The Bill will need support from at least 10 Republicans to meet the minimum 60 required to move the legislation forward, that is assuming that all Democrats vote along party lines, which has also been an issue of late.

New Jersey became the newest US state to start adult-use cannabis sales on April 21st with access becoming open to a potential 800,000 new adult-use customers. The state program starts with an initial 13 locations and is expected to grow quickly as access remains limited for most. Earlier in April, New Mexico also jumped on the adult use train with sales topping expectations. Policy makers expect the adult-use sector to generate more than $50M in revenue for the state in the first year alone.

Switzerland is expected to launch a trial adult-use program this summer that will involve over 400 people. The initiative is to start in Basel and aims to provide information to regulate cannabis in the whole country. The program is intended to run for two and a half years to collect robust data sets for regulators to develop effective cannabis policy. A nice summary of current medical trial programs in Denmark, France, Ireland and Luxembourg can be found here.

Momentum continues to chug along in Germany, where the Health Minister is pushing for cannabis reform to be expedited as the dangers of status quo outweigh the dangers of adult-use reform. Although part of a larger agenda surrounding the German healthcare system, a vote of confidence from the Health Minister should push lawmakers to prioritize cannabis reform in Germany.

Fund holding Clever Leaves (NASDAQ:CLVR) expands capabilities in Germany with access to 20,000 pharmacies with the receipt of all the required regulatory licenses, permits and certifications by the German authorities to distribute medical cannabis to wholesalers and 20,000 pharmacies in Germany.

Fund holding Innovative Industrial Properties (NYSE:IIPR) raised US$345M in an equity offering in April with the intention to deploy the proceeds in industrial real estate assets used in the cannabis industry. The strong market response is an indication of cannabis interested investors who remain on the side lines due to regulatory constraints of banking and financial services. IIPR acts as a middle-man for cannabis related financing as it skirts regulations for not being a ‘plant-touching’ business.

Macro Outlook

Persistent macro fears have resulted in one of the steepest equity routs in recent years as investors digest a plethora of macro headwinds. An overtly hawkish FOMC is working overtime to control inflation which is a function of constrained supply chains and elevated consumer demand. As the era of easy money comes to an end, the market is looking to right-size the excesses of the past three years and bring run-away valuations multiples under control. Risk assets across all sectors and geographies have experienced significant pullback with the high-flying Nasdaq off 13% for the month alone. The worst monthly performance for risk assets since the global financial crisis.

Cannabis is no exception to this reckoning with valuations of cannabis companies at multi-year lows, moving lock-step with risk on asset classes and ending the month in the red. All gains related to improvements in fundamentals and progress related to regulatory reform has now been discounted back at least two years as investors struggle to maintain ownership of stock. The total addressable market for all cannabis verticals continues to increase with New Jersey and New Mexico’s adult use programs coming online in April. In the near future, we also expect to have further clarity on the New York legalization program in addition to the German program which is targeting 2024 for launch. The companies in the space themselves, continue to significantly grow their top line sales and achieve positive cash flow. The ability of cannabis businesses to maintain sales through 2022 with a weakening consumer is fairly impressive, especially when we take a look at other pandemic darlings which have started to lose steam for sales growth.

Cannabis as an investment theme however continues to be a single data point story which is regulatory reform. Investors were further disappointed in April, as US Senate Leader Chuck Schumer further delayed the Cannabis Administration and Opportunity Act (CAOA) with a target of introducing the final form of the bill before the August congressional recess. The continuous delays have made it difficult for stakeholders to maintain their cannabis positions, especially with the macro-economic narrative becoming increasingly worrying. This is not to say that investors don’t realize the potential opportunity. In April, Innovative Industrial Properties (IIPR) was able to raise $345M of equity against their NYSE listing so they could directly deploy funds into an industry low on cash but high on prospective growth. Investors are showing an understanding of the fundamentals but have limited appetite for the technical and regulatory narrative.

The Fund CBDX was off -18.19% in April alone with ancillary services sector suffering some of the worst outflows. Jazz Pharma (JAZZ) the largest holding in CBDX is up 25% for the year and remains the biggest contributor to fund returns YTD. Even though constituent companies continue to show strong fundamental performance, the story is caught up within the macro narrative. There are certainly hiccups in the path for current cannabis investors but given the momentum of global cannabis proliferation and reform, we believe it will be the early investors who are compensated the most for the early risks taken and for the nerves held through the tough times.

Please note that all performance figures are showing net data. Past performance is not a guarantee of future performance.

The Medical Cannabis and Wellness UCITS ETF Performance Table (As of 30.04.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 30.04.2022. Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. 

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