The world’s outlook on cannabis is changing, and so is the way investors are assessing the cannabis industry. S&P Dow Jones Indices has recently announced its discontinuation of two cannabis stock indices – the Canadian Cannabis and Cannabis International Indices – signaling a shift in investor focus for the industry.
1. S&P Drops the Hammer on Cannabis Stock Indices
It has been a tumultuous few weeks in the cannabis stock market, with index providers S&P Dow Jones Indices (SPDJI) dealing a huge blow to the industry.
In an unprecedented move, SPDJI dropped cannabis-related indices from its Global Industry Classification Standard (GICS). This means that stocks listed on specific cannabis-related indices – namely ETFMG Alternative Harvest ETF (MJ) and Horizon Medical Marijuana Life Sciences Index ETF (HMMJ) – have now fallen out of favor with some of the biggest investors.
- What this Means – This move by SPDJI is significant in that it shows how opinion on the cannabis industry has shifted from a place of optimism to one of stalling suspicion.
- Four-year Slip – This decision by SPDJI has caused cannabis stocks to suffer a huge drop – the Solactive Canadian Cannabis Index, for example, has dropped 92 points in the last four years.
- Areas of Impact – As S&P Dow Jones Indices accounts for about 85% of global index linked assets, the shift in sentiment is going to hit hard, with areas such as banking, insurance and banking feeling the effects.
The fallout from the S&P Dow Jones Indices decision has been huge, and investors and companies alike will be feeling the effects. While the future of the cannabis industry remains uncertain, one thing is certain – this isn’t the last time the cannabis sector will be affected by a decision of this kind.
2. Cannabis Industry Hits a Market Low
The cannabis industry has seen a dramatic downturn in the market this year.
- Investors Pointing to Over-Expansion – An influx of capital into the space during 2019 has led to numerous mega-mergers, but many investors are now pointing towards an over-expansion of the industry. This means that the market is now becoming increasingly more competitive and difficult to break into.
- Rising Costs of Production – The costs of producing cannabis has also taken an upwards turn recently. From increased regulation, taxes, and demand, the cost to cultivate a top-shelf flower is becoming more and more expensive. This has caused many smaller growers to exit the market completely.
At the same time, the industry is seeing a dip in demand due to the rise of cheaper alternatives. This includes edibles, oils, and concentrates – all of which are more cost effective than traditional flower varieties. This means that the traditional flower is now seeing a sharp downturn in sales, leaving many producers unable to turn a profit.
3. International Markets Feel the Impact of S&P Decision
The recent Standard & Poor’s decision to downgrade the United States from its AAA rating is having far reaching impacts, even on global markets. While U.S. stocks were quick to drop, foreign markets have been responding as well.
The European markets, in particular, have experienced some immediate and drastic reactions. Stocks, especially those of companies that deal in commodities, took a nosedive in the wake of the ratings cut.
- The London Stock Exchange experienced a record drop in Royal Dutch Shell and BP – both oil and gas giants – as the index dropped its lowest points for the entire day.
- The Tokyo Stock Exchange saw a 4.2% dip, with companies like Sony, Toyota, and Honda heavily affected.
- The Swiss Market Index was hit the hardest, slumping 5.5%.
The results of S&P’s rating decision are still yet to be told and, while some predict the recession to be over soon, it is yet to be seen how global markets will respond to the downgrade.
4. Time to Reassess Investment Strategies?
With the fast-changing landscape of the global economy, it is important for investors to continuously reassess their investment strategies. Without regular review, an investor’s portfolio runs the risk of becoming out of step with the current economic environment.
Modern investors have more ways than ever to assess and re-balance their portfolios.
- Analytical Tools: Complex analytical software can help to identify areas of structural weakness, isolate risk factors, and gauge areas for potential growth. This type of tool offers greater insight into the dynamism of the markets.
- Financial Advisors: Market professionals can offer insights onto current trends, as well as provide advice on making the best decisions for an investor’s portfolio. Many advisors also provide necessary reassurance, especially when markets are in flux.
- Research: Research into current topics and trends can help equip investors with the skills and tactics needed to succeed in the markets. Whether reading financial newspapers, watching the markets, or understanding the latest industry developments, research allows investors to stay ahead of the curve.
By leveraging these resources, investors can take control of their investment strategies and ensure that their portfolios remain adequately balanced and positioned to maximize their returns.
Though the news has been dismal for many, hope remains that the cannabis industry will continue to grow and innovate to meet new standards of excellence in the marketplace. The S&P discontinuing the Canadian and international cannabis stock indices serves as a painful reminder of the inherent risk that exists when investing in the industry, and investors can look to future developments for signs of the industry’s health.