Written by Rahul Bhushan, co-founder at Rize ETF
We’ve seen major progress in the world of medical cannabis over recent years but, according to Rahul Bhushan, co-founder at Rize ETF, the future looks particularly bright for investors in the sector.
The substance’s therapeutic benefits have been increasingly accepted among healthcare professionals. And as its mainstream adoption has advanced–particularly in North America–many businesses in the sector have enjoyed periods where their valuations have soared.
But with many other countries around the world now looking at their own regulatory stance on the medical use for cannabis, the ship has far from sailed for investors. In fact, with a number of key political and regulatory breakthroughs on the global horizon, we believe the green investment opportunity could still be in its nascent stages…
Hashing it out
A bank of evidence has been growing over the last decade that suggests the active ingredients in cannabis, known as cannabinoids, produce a range of therapeutic effects.
Specifically, these chemicals interact with the body’s endocannabinoid system. In doing so, they are thought to be effective in treating everything from pain and anxiety to multiple sclerosis and epilepsy.
Because of such benefits, a plethora of medical cannabis products now line pharmacy shelves worldwide. These include but are not limited to Sativex (a mouth spray used to treat muscle spasms), Dronabinol and Nabilone (used to treat nausea and vomiting caused by chemotherapy), and numerous cannabis oils.
All-in-all, 248 million people in the US alone now have access to a form of legalised cannabis. But as impressive as this figure may be, the truth is the substance’s liberalisation, decriminalisation, and legalisation has not advanced as much as it could have done.
Instead, the sector has been repeatedly stymied by false flags, competing agendas, and regulatory impediments. And the uncertainty this generates has not only placed a ceiling on the growth of cannabis stocks, but it can also put many would-be investors off entirely.
The good news is this looks to be changing.
In the last six months alone, several reforms have emerged to provide a strong foundation for the accelerated expansion of medical cannabis in the months and years ahead.
In the United States, for example, President Biden announced in October that he would pardon all simple federal cannabis possession cases. This echoes policy at the state level, with as many as 31 no longer prosecuting or criminalising the possession of small amounts of marijuana.
That same month, the US President also announced that he would fast-track a review of the federal scheduling of cannabis.
Currently, the plant is classified as a Schedule 1 drug – a category it shares with narcotics like heroin. But Biden has requested that a review of this grouping be expedited, triggering an immediate spike in the value of US cannabis stocks.
Meanwhile, most recently and perhaps most notably, Biden also signed the first piece of standalone federal cannabis reform legislation in US history into law.
Known as the Medical Marijuana and Cannabidiol Research Expansion Act, the statute gives the US attorney general 60 days either to approve a given application from a cannabis research applicant or request supplemental information.
The move creates a more efficient pathway for researchers who request large quantities of cannabis. This is vital to understanding the substance’s therapeutic benefits and helping millions of people, so it goes without saying that it is hugely significant.
We’re also seeing progress in Europe, which lags North America in cannabis policy with its focus on decriminalisation rather than full legalisation.
In November, Germany unveiled plans to decriminalise the possession of up to 30 grams of cannabis by 2024. Alongside this, it also announced that it intends to allow the sale of the substance to adults in a controlled market for recreational purposes.
This would be the most liberal cannabis policy in the entire trading block, and it’s likely that Germany’s neighbours will be watching closely. We’ll have to wait and see whether they follow suit.
Aside from the opportunity to better treat millions of people worldwide, the root cause of the changing attitudes in the examples given above is, in blunt terms, money. In other words, politicians and legislators alike are recognising that the legalisation of cannabis – both medical and recreational – has numerous economic benefits.
Indeed, the US medical marijuana market alone generated US$8.5 billion in 2020 and is expected to grow beyond US$16 billion by 2025. It’s impossible to say for sure, but if the direction of policy currently being cemented continues, then this figure stands to proliferate further over longer time horizons.
This, of course, if good for any given economy. But it’s also good for investors.
After all, as the headroom into which medical cannabis stocks can grow expands, so too does the potential strength of their balance sheets. Among other things, this can equate to both valuation growth and shareholder returns in the form of dividends and buybacks over time.
We cannot deny that the performance of medical cannabis stocks has oscillated in recent years in line with the sector’s ever-changing outlook and regulatory procrastination. But with the number of signposts for liberalisation growing globally, we see an opportunity for reduced volatility and accelerated growth on the horizon for the coming months and years.