Medical Cannabis Monthly Report | August

Medical Cannabis ETF Monthly Report: Key Takeaways

The SAFE Banking Act was passed in the US House of Representatives for the seventh time in July, this time attached to the back of the National Defense Authorization Act (NDAA).[1] The House continues to support incremental cannabis reform and with the Cannabis Administration and Opportunities Act (CAOA) now drafted and finalized, there is significant momentum to move cannabis reform forwards.

The fight for survival of the CBD industry continues in Ireland as restrictive policies are challenged in the Irish High Court.[2] A final judgement is scheduled for October which will decide the fate of CBD companies active in Ireland, as well as could open the gates for much broader reform in the country.

Major League Baseball (MLB) is the first of the major US’ sports leagues to allow CBD brands to sponsor its baseball teams. CBD brands have already been very active in the golf, extreme sports and mixed martial arts arenas, but MLB offers a whole new audience for CBD brands to advertise to. [3]

Starting August 1st, Switzerland became the latest European country to legalize medicinal cannabis.[4] Patients can access medical cannabis through a prescription and the regulation is even allowing for exports of medical cannabis for commercial purposes with oversite from Swissmedic. There are currently about 3000 patients in the Swiss medical program, but the program is expected to increase significantly in coming years. [5]

Please note that all performance figures are showing net data. Past performance is not indicative of future performance and when you invest in ETFs, your capital is at risk.

Macro Outlook

Equity markets took a breather in July after many months of worrying narratives which has led to a protracted price discovery exercise across asset classes. With markets fearing a slowdown of the global economy, the words 'better than feared' were a relief to investors as earnings season started in the US. Heavily shorted equities outperformed in July and the benchmark indices rallied with the S&P500 up over 9% and the NASDAQ up over 12% in the month.[6] In their July meeting, the Federal Reserve raised rates by 75bps; however, the Fed also moved back to a data-dependent model which comforted investors with a lower chance of a policy error.[7] August lull is helping calm the markets but given the uncertainties of the macro backdrop, volatility is likely to remain in equity markets.

Just as equity markets are finding some calm, cannabis equities also look to be finding support. Cannabis reform has found some momentum on Capitol Hill in the US. Soon after Chuck Schumer filed the Cannabis Administration and Opportunity Act (CAOA), discussions started moving from more comprehensive reform towards incremental reform.[8] The controversy surrounding Brittney Griner's detention in Russia is supercharging the topic of expungements and clemency in the United States.[9] Senator Corey Booker, who has been central to the CAOA, has expressed openness to a compromise bill. Markets are slowly pricing in higher chances of this compromise bill to pass within the lame duck session, moving the goalposts to late 2022 for reform to be passed.[10] This is the strongest momentum cannabis reform has shown in the past 18 months, and the stocks are starting to reflect this.

The companies in the space however are experiencing a slow-down in growth directly related to the slowing economy. Operators have pulled back capital expenditure for growth to better manage balance sheets against the prospects of financial services reform. This impact was more apparent with hydroponics providers recording large declines in revenue.[11] Medical cannabis and pharmaceutical cannabinoids businesses fared better in the month gaining back some momentum with broader markets. The next phase of growth for medical cannabis is to come from Europe, with multiple jurisdictions running through pilot programmes to collect medical evidence. [12]

The Medical Cannabis and Wellness Equity Index was flat for the month of July as ancillary names including aforementioned hydroponics businesses struggled in Q2 and guided sales lower. Although CBDX is positioned to capitalize on medical cannabis market growth, Federal reform in the US remains an overhang on the whole cannabis complex.[13] Momentum on the political front has been building all year and many signs are pointing towards incremental reform coming within the lame duck session of the US, the period between the mid-terms and when Congress actually switches over to new leadership.[14] If this truly is the case then the bottom in cannabis stocks has already been put in. If not, then there is little visibility as to how Republicans will treat the issue next year. Throughout this noise, cannabis businesses continue to grow their fundamentals and grow addressable markets.

The challenges within the cannabis space are real and unabashed as is evident in the valuation compression experienced in the space over the past 18 months. The space is riding on the momentum of US cannabis reform, which has come along at a snail’s pace. Investors are setting goal posts against the midterm elections of 2022, hoping for Hail-Mary reform to get the industry going again, both in terms of increasing sales, as well as profitability and therefore valuations. We believe that the CBDX Fund is positioned to maximize returns based on US reform but at the same time also has exposure to the strong fundamentals of Europe and the ancillary industries which continue on their path of momentum.

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 31.07.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31.07.2022. 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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