Thank Fathom it's Friday

Buying high?

12 May 2017|

A sideways look at economics

Once the week’s work is complete, Fathom staff, on occasion, are permitted to help themselves to a light ale from the company fridge. But what if they were to indulge in something stronger? Smoke a little cannabis perhaps? Such an idea is unlikely to pass muster with management, not least because the substance is banned in the UK!

But in other parts of the world such behaviour would not be as far out as it sounds: several US states have legalised the sale of marijuana for recreational purposes; Canada looks likely to follow suit; and the Liberal Democrats have pledged to do just that if they win the upcoming UK general election.

Whatever your views on marijuana (and whether or not you, for example, tried it, once, at college and didn’t inhale), the investment opportunities created by changes to the industry should not be ignored.

The world’s best performing hedge fund in 2016 made money by investing in the marijuana industry. Bloomberg has even created a global cannabis index, which has comfortably outperformed the S&P 500 since its inception last year. Its constituents now have a market capitalisation of US$52 billion. The term retirement pot really could be taking on a new meaning. Granny smoking a joint? Think again.

To some, this is clear evidence of another stock market bubble. Valuations are excessive and many of the stocks in the index do not even turn a profit. There is also the small issue that marijuana is illegal under US federal law. Have investors gone mad? Are they high?

Perhaps, but there are some reasons to be optimistic about the industry’s potential.

An increasing number of voters favour legalisation. Five US states voted for legalisation for recreational use in November last year. Admittedly, four of these states also voted for Hillary Clinton so a Republican administration may not see politics as an obstacle for adopting stricter enforcement of federal laws.

But Florida, a crucial swing state, voted in favour of allowing the sale of marijuana for medical use. Indeed, 28 US states now allow marijuana for medical purposes. Alaska voted to legalise it for recreational uses. And Republicans would not want to lose Alaska, surely.

The bottom line is that there appears to be a trend of voters moving in favour of legalisation. If this continues, demand for legal highs looks set to, well, hit new highs.

Not all of the companies in the cannabis index are run by stoners. In fact, many are involved in cutting edge research and development for medical purposes.

There may be other benefits to legalising weed too: tax revenue would go up; illegal drug selling and associated crime would go down; it has been reported that the snack industry may benefit too.

The marijuana industry is also creating jobs. Some estimates put the number of people employed in this industry in the US at 150,000. It is impossible to verify this figure, but the BLS are reportedly set to start monitoring statistics in the industry later this year. Could stoners contribute to a stronger labour market? It is not impossible.

It may be too soon to tell whether the marijuana industry will go up in a puff of smoke. But whatever the outlook, investors may wish to consider the merits of investing in the industry more closely. Other industries may also be affected. Indeed, some investors claim, with a straight face, that the legalisation of cannabis threatens the beer industry, since legal cannabis would offer a carb-free alternative. Either way, the industry is fragmented and ripe for mergers and acquisitions. This really would give new meaning to the term joint venture.

Thank Fathom it's Friday

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