Another cannabis bubble is brewing

Cannabis euphoria has now come to Britain after the first company listed in London that produces medicinal products from the marijuana plant. But investors really need to keep a clear head.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Garry White

Just as the Toronto Stock Exchange acts as North America’s cannabis equity capital, there are claims that London could become the “marihuana hub” of Europe. Britain will be positioned at the vanguard of a new global industry – one that looks likely to grow significantly over the next few years. However, lessons from the US and Canada imply that investors should proceed with care.

Last year, the UK’s financial watchdog gave the green light for certain legal cannabis businesses to list on the London Stock Exchange. Last week saw the first such IPO.

Shares in Israeli group Kanabo tripled following their London listing last week, as investors scrambled to buy into the UK’s first legal marihuana flotation. This followed the secondary listing of MGC Pharmaceuticals last week, which already floated in Australia in 2016. MGC raised £6.5m on its London debut, with shares in both offerings being significantly oversubscribed.

Both these businesses met the tight requirements laid out by the Financial Conduct Authority (FCA) in September last year.

The FCA will only allow companies developing medical products to IPO on the London stock Exchange. Kanabo is developing cannabis-based inhalers to treat sleep disorders and relieve pain, with MGC also developing medicines based on marihuana derivatives.

UK medical cannabis companies with a Home Office licence are allowed come to market, as there are clearly no international legal complications. However, for an overseas company such as Kanabo, its management need to prove to the FCA that its activities would be legal if they were carried out in the UK.

Proceeds of crime

Profits from recreational cannabis companies, even when they are located in countries or US states that have legalised the drug, could fall foul of the Proceeds of Crime Act 2002 (PoCA).

Because of legal complications spanning multiple jurisdictions profits from overseas medicinal cannabis business may technical be legally classified as “criminal property” for the purpose of the PoCA. This includes where the company possesses a licence issued by an overseas medicines or pharmaceuticals licensing authority.

This prudence is appropriate – but it creates several issues for investors. It means that there will be a limited number of ways for UK residents to invest in the medical marihuana sector, which is clearly a recipe for overvaluation in less frenzied times, as it is likely to be a crowded trade. However, this new wave of companies is coming to market at a time when a bubble might be brewing once more.

The first marijuana investment bubble inflated after a number of US States decriminalised cannabis to a greater or lesser extent – and after Canada went the full hog and legalised marijuana for recreational use in October 2018. Investors piled into the sector on hopes of a decriminalisation domino effect – with the industry legitimised all over the world. This, clearly, failed to materialise.

In markets where cannabis was legalised, demand also turned out to be lower than expected. It wasn’t the licence to print money that many thought it would be and the first bubble burst in mid-2019.

Biden creates buzz

However, the election of Joe Biden has got investors buzzing about cannabis all over again. The industry hopes that the new Democrat president will resolve legal issues that have held the American industry back.

Although states such as California have legalised its recreational and the majority of Americans live in states where some form of legalisation of cannabis has taken place, it remains federally proscribed. This has meant banks and other companies have held back from providing services to any business involved in the fledgling businesses, putting the brakes on its development. The industry hopes Mr Biden will now set it free.

These hopes have sent shares in the global cannabis sector surging once more – just as the UK makes its first, tentative moves to allow medical cannabis companies to join the Official List. Once again, there is a danger that valuations could get out of control.

From an economic standpoint, a strong, regulated – and fully legal – cannabis industry has a number of benefits, including generating tax revenues and creating jobs. However, the problem for the marijuana optimists is that Mr Biden has a lot on his plate dealing with the pandemic and resulting economic crisis. Untangling the web of complexities in cannabis laws is not exactly at the top of his agenda, even though he indicates he is in favour.

Even more optimistic are those hoping for the legalisation of recreational cannabis in the UK any time soon. Last year, the Taxpayers Alliance made a compelling economic argument for such a move. It calculated that the UK could save at least £890m a year in reduced spending by police, prisons, courts, and the NHS through pain relief treatments if Britain went for full legalisation. 

Of course, cannabis legalisation has been on the fringes of political discussion in the UK for several years, with attitudes changing significantly. Some have suggested that the debts built up in the wake of the Covid-19 pandemic provide the political wind of change needed for reform. Indeed, the Covid-19 pandemic means the UK now has a £271bn hold in its finances. Speeding up the pace of cannabis reform in the UK could help plug that gap.

However, any changes are likely to be slow and incremental – as the FCA has demonstrated. It is unlikely to justify any bubble that might be brewing. Once again, industry hopes appear to be much too high.

A version of this article first appeared in the Daily Telegraph.  

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

More from author

  1. Garry White

    Last Week in the City: Another new high for global equities

    Date: 9th Apr 2021 12:17pm

    Garry White, Chief Investment Commentator, provides a round-up of the market movement...

  2. Garry White

    Will copper derail the climate agenda?

    Date: 8th Apr 2021 08:16am

    China has been stockpiling metals ahead of a global infrastructure push that will see...

  3. Garry White

    Last Week in the City: America’s jobs plan unveiled

    Date: 1st Apr 2021 11:44am

    Garry White, Chief Investment Commentator, provides a round-up of the market movement...

Most read articles

  1. Another cannabis bubble is brewing

    What’s best for the average investor – shares or funds?

    Date: 12th Apr 2021 15:20pm

    With lots of people taking up investing for the first time, Rob Morgan looks at the t...

  2. Another cannabis bubble is brewing

    Fed policy is crucial to markets and the recovery

    Date: 12th Apr 2021 09:55am

    Concerns about a sharp rise in US inflation have eased, but Federal Reserve policy re...

  3. Another cannabis bubble is brewing

    Are higher business taxes on the horizon?

    Date: 9th Apr 2021 10:32am

    This week, the finance ministers and central bankers of the world’s biggest economies...

Investment involves risk. You may get back less than invested.