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Investors are experiencing a cannabis comedown

Things seemed to be turning out well for pot-heads in 2019 – and for the companies that seek to provide for their needs. Then a new, more depressing reality dawned.

People smelling jars of cannabis © iStockphotos
Should you take a sniff? It depends on your appetite for risk

Things seemed to be turning out well for pot-heads in 2019 and for the companies that seek to provide for their needs. Then a new, more depressing reality dawned.

What's happened?

In the US, 33 states now allow medical use of cannabis, and 11 have legalised recreational use. Medical use is increasing across Latin America and in countries including Germany, South Korea and Thailand.Breathless predictions suggested that the legal global market could be worth $150bn within ten years that's about the size of the global illicit market now. Since the spring, however, the market has turned, with most pot stocks losing at least half their value, and plenty of them far more than that.

What has caused the downturn?

And the whole market has been spooked by unnerving data from California. The traditionally liberal state is the world's biggest legal cannabis market, where medicinal use has been legal since 1996. Ominously, though, since the legalisation of recreational cannabis at the start of 2018, the legal cannabis market has actually shrunk.

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According to stats from market analysts Arcview Market Research and BDS Analytics, the size of the legal cannabis market there fell from $3bn in 2017 to $2.5bn last year. The main reason for this is that many firms in the medical space have found the new array of regulations too onerous, and the fees for permits and licences so pricey that they've struggled to make their businesses work.

What about the recreational market?

In August, an Economist journalist researching the marijuana market at Harborside Oakland ("a modern-day temple to the delights and possibilities of the botanical marvel that is the plant Cannabis sativa") was advised she could get an ounce of cannabis delivered (illegally) outside the store for $150. Inside, the same product was priced at $400.

Is cannabis safe?

Won't regulation address that?

How policy-makers around the world balance these issues will be "the single biggest catalyst" when it comes to the future prospects of the sector, says Christopher Carey, an analyst with Bank of America. His bank's research puts the value of global cannabis sales at $166bn this year but the legal slice of that (mostly in North America) is just $15bn. Until that balance changes dramatically, investing in cannabis stocks is always going to be very high risk.

Is it still worth taking a punt?

One key factor to bear in mind is the distinction between recreational and medicinal uses. Europe is much more focused than North America on the latter sector. Companies such as GW Pharmaceutical, for example, have a number of promising patents for medical applications (Cannabidiol, or CBD, is the basis for its epilepsy drug Epidiolox, for example). This is the sector that currently has the most promise.

But potential investors should be aware that the market is immature the results of clinical testing (in the medicinal space) or the emergence of trusted consumer brands (in the recreational arena) remain to be seen. This situation will change in time, however. That could be the tipping-point.

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