Has the bubble exploded? Inventories have fallen, funds are drying up and balance sheets are messy. Assets managed by cannabis funds have fallen by 45 percent in 2,6 months. They reportedly lost $4,6 billion from $XNUMX billion the previous year.
Investors blame this on several factors. First, there are the repeated failed attempts to pass federal legalization legislation in the United States. But funds targeting legal cannabis markets have also fallen. Data shows that 23 ETF funds lost between 12% and 44,2% in 72 months.
Also investors see the influx drying up. In the first three months of 2022, they invested $95,6 million in cannabis funds, compared to $1,7 billion the year before. However, last year's activity had more to do with new listings on the London Stock Exchange. In the first five months of 2021, Oxford Cannabinoid Technologies, Kanabo Group and MGC Pharmaceuticals doubled the size of the cannabis market.
Shares have fallen sharply
Shares in these groups, like the rest of the industry, are down 60% and 80%. Canadian LPs have fared slightly better. Aurora Cannabis is down 57%, Canopy Growth is down 74% and Tilray is down 68%.
At the end of 2020, cannabis funds rose as media conglomerates declared Joe Biden the winner of the US presidential election. Funds rose further as investors assumed Democrats would make marijuana legalization a top priority. Easier access to the banking sector for cannabis companies in the US will also contribute to an increase.
“Everyone is looking at that now,” said Nawan Butt, manager of the Medical Cannabis and Wellness ETF. “If the SAFE Act is passed, financial institutions can help the industry. This means that industry participants will have better access to finance and better access to financial services. In addition, we will finally have investors in this market who are not afraid of being prosecuted under federal laws for holding marijuana stocks.”
Competition from illegal markets and higher costs for entrepreneurs
According to Morningstar figures, Global X is the worst performing cannabis ETF. Alec Lucas, a research analyst at Global X, accused consumers of buying cheap cannabis products that often come from illegal markets. That has helped slow sales in many states. “Canadian companies have been unable to raise prices to compete with illegal markets, resulting in disappointing revenues.”
In addition, ethanol prices have increased by 35%, impacting businesses using ethanol as a solvent for cannabis derivatives. Higher gas prices also put a strain on margins for cannabis delivery services, including wholesale.
Rising interest rates threaten cannabis bubble
The cannabis bubble could explode as interest rates rise. Central banks around the world are trying to raise interest rates after keeping them close to zero for more than twenty years. Many economists suggest that this manipulation of interest rates acts as an unnatural price control on the money supply. The result is a capital market that separates from consumer demand.
In other words, market interest rates normally reflect consumer demand and relative scarcity of capital. A central bank that lowers interest rates below the market rate creates an illusion of greater prosperity and thus of the resources to realize long-term projects. Banks and governments can blame Covid or the Russians for the supply chain disruptions, but there is evidence that monetary policy is the main culprit.
Major cannabis producers have negative cash flows and struggle to compete with the illegal market and smaller craft producers. Despite their popularity in the financial world, the fundamentals are not there to support their business model. Major producers closing facilities and laying off workers make it clearer every day that the cannabis bubble has popped.
source: cannabislifenetwork.com (EN)