After proving to be a popular investment theme across North America, cannabis is gaining interest in Europe, with 53 structured products linked to companies involved in the industry added to the SRP database over the last 18 months. "Although the legalisation of marijuana is in process across Canada and several states in the US, the market for cannabis companies is still young and overhyped, which is clear from the pricing in of profit potential way ahead into the future," said Marcel Wildförster (pictured), senior derivatives trader at Düsseldorf-based provider and brokerage house Lang und Schwarz.
While most of the companies involved in the cannabis industry have their headquarters in North America, the German structured products market has been quick to follow suit, with the listing of 48 leverage certificates (of which 42 are live) linked to the shares of a number of companies domiciled in Canada: they include, Aurora Cannabis, a medical marijuana producer and distributor; Cannabis Wheaton Income, which connects producers with distribution channels; Canopy Growth, a production facilities provider for distributors; and Marapharm Ventures, a medical marijuana grower.
"During extended bullish periods, an increasing number of third- and fourth-tier equities start to attract investor attention, which is currently the case with cannabis shares," said Wildförster. "However, once the market slows down again and uncertainty rises, these stocks are the ones to suffer large pullbacks because the focus moves back to fundamentals. In this, as well as in the political framework of the cannabis market, I see the greatest risks."
Alongside its range of turbos, Lang und Schwarz has also marketed several tracker certificates with reference assets such as the LUS Wikifolio-Index Cannabis & Cannabinoids Industry and Green Future: Cannabis. "As an issuer, Lang and Schwarz has specialised in working with private traders in Germany, and, over the past years, we managed to cover our niche with innovative products, such as the Wikifolio certificates and turbos built on unusual underlyings," said Wildförster.
"Unlike bigger banks, we have short decision path which allows us to be flexible and to react to the market demand in a timely manner. For example, in our conversations with clients and through internet forums, we noticed private investors' growing interest in the cannabis industry, so we answered accordingly with turbo certificates on a selection of cannabis shares."
According to Wildförster, the clientele for cannabis-related structured products is predominantly private investors looking for ways to spice up their portfolios. Through leverage products on cannabis equities, investors can achieve substantial gains, given the high daily price fluctuations of the stocks, "of course, accounting for the major risks involved", said Wildförster.
The North American Medical Marijuana Index, calculated by Frankfurt-based index provider Solactive, tracks 18 North American companies involved in medical marijuana, and was launched in cooperation with Canadian ETF provider Horizons, which came up with the concept, according to Steffen Scheuble, chief executive officer at Solactive.
Earlier this year, Horizons launched the first marijuana ETF, the Horizons Medical Marijuana Life Sciences ETF, which coincided with an almost 15% increase in the underlying index five days later. Since the initial positive reaction, the index has fallen gradually. "As new thematic indices are often very volatile, we assume that this [decline] is just within the standard cycle of thematic indices," said Scheuble.
So far, the index has not featured in any structured products. "Given that the sector is still not very liquid, it is more difficult to launch structured products, as the performance of the index needs to be tracked perfectly," said Scheuble.
According to Wildförster, the fate of many single marijuana-related stocks is to be decided. "We should wait and see how the market develops in the medium term, and if the gains anticipated by investors will indeed flow to them," said Wildförster.
Additional reporting by Aleksander Petkov
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