Cannabis sector set to benefit from US Presidential election
28th July 2020, London - Nawan Butt, Portfolio Manager of
The Medical Cannabis and Wellness UCITS ETF (CBDX) says the second half of 2020
is looking positive for the Cannabis market as it is set to benefit from major
catalysts on a macro and company specific level.
On a macro basis, he expects
Cannabis to be a key talking point in the US Presidential election in November,
and through the Democrats, it predicts greater long-term support for either or
both of the SAFE and STATES Acts, which will help strengthen the medical cannabis
businesses in the US (1).
In addition to this, he says
multiple companies continue to commercialise their medical cannabis and CBD
wellness strategies as key markets and research projects come online.
Nawan Butt, Portfolio Manager
of CBDX, The Medical Cannabis and Wellness UCITS ETF said: “Under
current regulations it is difficult to measure the appetite for cannabis
investments in the United States. Due to their inability to invest in cannabis,
US investors have found the next best associated growth vertical to capitalise
on this opportunity.
“Ancillary businesses have seen massive demand
as a high growth sector of the economy. Despite the current climate we have
seen large equity capital financings close for ancillary plays including
Industrial Innovative Properties Ltd (IIPR – a leading cannabis greenhouse
REIT) and GrowGeneration (GRWG – cannabis hydroponics supplier). Both these
financings were completed in excess of their original size, and anecdotally
were 5x and 3x oversubscribed respectively. These anecdotes speak to the
pent-up demand for growth stocks which is currently unavailable to many
investors.” Said Butt, of CBDX, Medical
Commenting on the performance of
the Cannabis market in 2020, he said the first six months show a great test of
resilience for nascent industries in high growth verticals such as cannabis. The sector as a whole experienced a similar
fate to other high-growth vertical but has come to outperform broader market
indices such as the S&P 500 and the FTSE 100 .
The underlying problem caused by
the pandemic is the disruption of business as many industries experiences a
stop in earnings with mandated shutdowns. Falling under the umbrella of medical
services, most of the cannabis sector remained unaffected and continues with
jobs and earnings growth.
However, within underlying
sub-sectors, he stresses a differentiation of performance. Ancillary services
combined for the strongest performance as companies with arms-length businesses
to cannabis experience excess demand from investors in anticipation of
progressive cannabis legislations in the US.
Pharmaceutical cannabinoids found
a boost under the umbrella of healthcare and maintained strong upsides in
valuation as the healthcare sector works overtime in an attempt to heal the
Butt further added: “There
are few public companies operating in the CBD wellness space and their
immediate shedding of excesses in response to business slowdown has stabilised
valuations. Second quarter earnings results will provide us with a better idea
of their earnings growth in times of duress, especially in retail.”
Lastly, is the medical cannabis
sub-sector which experienced difficulty operating in a capital-intensive
industry with profitability still a promise of tomorrow? The silver lining here
is the rationalisation of industry participants which will consolidate future
sales on the basis of more reliable infrastructure.
The Medical Cannabis and Wellness
UCITS ETF, is a UCITS compliant Medical
cannabis ETF listed on the LSE, XETRA and SIX. The fund tracks a
rules-based Medical Cannabis and Wellness Equity Index from Solactive,
consisting of publicly listed companies conducting legal business activities
across nine thematic sub-sectors in the medical cannabis, hemp and CBD
cannabis ETF, CBDX, seeks to provide targeted exposure to the rapidly
expanding legal medical cannabis industry that is set for further growth as
more countries legalise cannabis for medical use. When you trade ETFs, your
capital is at risk.