This article provides a brief overview of the economic opportunities in the Legal Cannabis Industry and is not intended as a motivation for or against investment into this market.

The idea of investing in an alcohol company back in 1932, would have probably resulted in you being shunned by the Wall Street Elite. The lifting of Prohibition in 1933 however, made way for the golden decade for Alcohol Companies, generating a 20% per annum return in US Dollars as a sector; twice that of the US market over the same period.

Retail Cannabis

The US currently has 11 states that have fully legalized both recreational and medical Cannabis, with a mere 7 of those States currently taxing and regulating revenue producing stores. This has not hampered the growth of the Legal US Cannabis Sector in the slightest, as it grew by 38% per annum from 2014 to 2018.

By the end of 2018, it was rivaling other well-known recreational industries:
• Legal Cannabis Revenue US 2018: $11 Billion
• US Beer Sales 2018: $12.6 Billion
• NFL Revenue 2018: $8.16 Billion
• Canadian Ice Hockey 2018: $8.4 Billion

The demand for retail cannabis has been well documented for some time. The legalization of Cannabis in California alone, brought an estimated $13.5 Billion “grey” market to the surface. Despite the existing market, demand continues to grow as the stigma associated with Cannabis is eroded by decriminalization and ongoing medical research.

Medical Cannabis

The growing demand for retail cannabis products is indeed exciting, but not nearly as exciting as the long term medical or pharmaceutical applications. There are many who remain skeptical about the medical applications of Cannabis. Big Pharma are under no illusions however, as to the risk that Cannabis pharmaceutical applications pose to their market share:

  • 2018 saw an 11% decrease in pharmaceutical subscriptions, in favour of Cannabis for the following disorders: Chronic Pain, PTSD, Sleep Disorders, Anxiety, Epilepsy, Nerve Pain, Cancer Side Effects, Tourette’s syndrome, Glaucoma.
  • Medical Cannabis is expected to poach close to $4 Billion in market share annually from Big Pharma.
  • It is no surprise then that the following Companies held the most Medical Cannabis patents by the end of 2019:
  1. Abbvie
  2. Sanofi
  3. Merck
  4. Pfizer
  5. Hebrew University of Jerusalem (Israel).
  6. Roche
  7. University of Connecticut.

There are over 500 compounds that make up the Cannabis plant, with just 80 of these currently being used. THCV (Tetrahydrocannabivarin) is just 1 of the 100 cannabinoids contained in the plant, often referred to as the “sports car” of Cannabinoids. In lower doses, THCV reduces appetite by inhibiting the action of CB1 receptors. Early research shows promising applications for this compound in treating obesity, diabetes, inflammation, tremors, and seizures.

Whilst research into these compounds is in its infancy, the diverse array of therapeutic compounds already identified in Cannabis coupled with Big Pharma’s recent push into this sector, underpins an exciting long-term growth theme.

National Cannabis Investment

It is no surprise that the US currently leads the way in all things Green, but this should not deter other countries from entering the market, particularly South Africa.
There are the more obvious and immediate economic benefits to the Cannabis Industry, in the form of taxation on both the sellers and producers of Legal Cannabis products. Cannabis was fully legalized in 2016 in California, and as of the end of 2019, the State received the following tax revenue from Legal Cannabis for the year:
• $411 Million in excise tax.
• $99 Million in cultivation tax.
• $335 Million in sales tax.

There have also been impressive indirect wealth effects that have accompanied legalization in US states, most notably, the creation of new jobs. In 2019 the Cannabis sector created 211 000 new jobs in the US, as detailed in a research paper by Mr. Bruce Barcott et al, Whitney Economics.

The diversity of the plant has resulted in the creation and growth of several ancillary economies, which in turn only bolster the argument for legalization by Governments around the world. The following are just a few examples of indirect beneficiaries:

• Cannabis Point of Sale software – Cova.
• Green Lawyers – legal firms who specialize in Cannabis laws only.
• Agricultural Technology – extraction, processing, packaging.
• Real Estate – Listed US Property companies that only invest in Cannabis related fixed property.
• Cultivation – The commoditization of cannabis cultivation.

Despite the ongoing research and investment into the automation of Cannabis production, it will remain a labor-intensive process, something South Africa should take note of. We are in desperate need of economic growth, tax revenue and job creation.

Investing in Cannabis

There are many ways one can invest into the Cannabis boom; however, at this stage, the market remains immature and volatile. The Gold Rush occurred in California between 1848 and 1855 and attracted over 300 000 new players into the market in a short period of time. It created initial chaos and disorganization, which would settle with maturity.

As we approach the end of a 40-year debt super cycle, many market pundits would have us believe that we face a decade or more of secular stagnation – negligible or no economic growth. This raises the question of whether so called “frontier markets”, such as Cannabis, should be considered in the future to bolster real growth?

In conclusion, investing into the Cannabis industry at this stage is not viable for retail investors in my opinion, but this may become a thing of the past if the Legal Cannabis Industry continues its explosive path.

Harbour Wealth Duncan Wilson Senior Wealth Manager

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