While some find the situation analogous to the repeal of Prohibition in the United States, it’s also fair to point out that such events happened 85 years ago in the midst of the Great Depression. It was a long time ago, and in a very different economic climate. Today’s infographic comes to us from Evolve ETFs, and it shows what investors should know as the legal cannabis sector comes out of the dark.
What Cannabis Investors Should Know
Since there is so much happening at once with little precedent for what such a market will look like, it’s worth summing up the sector’s potential in broad strokes:
- Global Size According to research from The Brightfield Group, the size of the legal cannabis sector is expected to surge from $7.7 billion to $31.4 billion between 2017 and 2021. Currently the recreational market makes up only 37% of the global total – but by 2021, that will rise to 57%.
- Versatile Uses Cannabis comes in different forms. One gram of dried cannabis is roughly equivalent to:
5g of fresh cannabis 15g of edible product 70g of liquid product 0.25g of concentrates 1 cannabis plant seed
These can be used in various medical applications, including to fight chronic pain, migraines, anxiety, multiple sclerosis, and nausea. Cannabis can also be used to treat Alzheimer’s, PTSD, and cancer. 3. North American Growth By 2021, it’s estimated that North American sales will make up 86% of the global market. Specifically, the U.S. legal market is projected to hit $18.1 billion by that time, while the Canadian legal market is expected to be $8.9 billion in that same year. 4. A Shifting Legal Landscape Canada will be the first G7 country to legalize cannabis at a federal level. In the United States, recreational cannabis is already legalized in nine states – but this could change swiftly as various states undergo referendums. 5. European Markets In 2017, the legal market for cannabis is estimated to be just $0.11 billion, but by 2021 it will have expanded to $3.8 billion. According to The Brightfield Group, growth will be quite impressive in Western Europe: Germany’s market will grow at a 284% annual rate, the Netherlands at 364%, and Spain at 334%. 6. Rest of the World Although markets outside of North America and Europe will not see the same growth in absolute dollar terms, the legal cannabis market will still expand from $80 million to $350 million, led by activity in Latin America. 7. Pharmaceutical Research Israel has a special place in the cannabis world – the country is world leader in medical cannabis research, and industry expects that it will eventually translate into a $1 billion export opportunity. That said, export plans have hit a recent road bump. 8. Investment Activity Compare the start of 2018 to that of 2017, and you’ll see an impressive difference in investment activity. For this we use Canada with its impending recreational legalization as an example: in the first six weeks of 2018, investment was up nearly 7x over the previous year. Further, the average deal size increased from $5.6 million to $18.7 million. Meanwhile, the Canadian Cannabis Index rose 201% between January 2017 and January 2018. 9. How to Invest? There are a variety of ways to gain exposure to the sector, including:
Licensed producer stocks Biotech stocks Ancillary services stocks Licensed retailer stocks Cannabis ETFs
Regardless of how you play it, the legal cannabis sector is coming out of the dark – and it will be interesting to see how the industry takes shape. on These are in the form of Treasury securities, some of the most liquid assets worldwide. Central banks use them for foreign exchange reserves and private investors flock to them during flights to safety thanks to their perceived low default risk. Beyond these reasons, foreign investors may buy Treasuries as a store of value. They are often used as collateral during certain international trade transactions, or countries can use them to help manage exchange rate policy. For example, countries may buy Treasuries to protect their currency’s exchange rate from speculation. In the above graphic, we show the foreign holders of the U.S. national debt using data from the U.S. Department of the Treasury.
Top Foreign Holders of U.S. Debt
With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt. Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years. This bond offloading by China is the one way the country can manage the yuan’s exchange rate. This is because if it sells dollars, it can buy the yuan when the currency falls. At the same time, China doesn’t solely use the dollar to manage its currency—it now uses a basket of currencies. Here are the countries that hold the most U.S. debt: As the above table shows, the United Kingdom is the third highest holder, at over $655 billion in Treasuries. Across Europe, 13 countries are notable holders of these securities, the highest in any region, followed by Asia-Pacific at 11 different holders. A handful of small nations own a surprising amount of U.S. debt. With a population of 70,000, the Cayman Islands own a towering amount of Treasury bonds to the tune of $284 billion. There are more hedge funds domiciled in the Cayman Islands per capita than any other nation worldwide. In fact, the four smallest nations in the visualization above—Cayman Islands, Bermuda, Bahamas, and Luxembourg—have a combined population of just 1.2 million people, but own a staggering $741 billion in Treasuries.
Interest Rates and Treasury Market Dynamics
Over 2022, foreign demand for Treasuries sank 6% as higher interest rates and a strong U.S. dollar made owning these bonds less profitable. This is because rising interest rates on U.S. debt makes the present value of their future income payments lower. Meanwhile, their prices also fall. As the chart below shows, this drop in demand is a sharp reversal from 2018-2020, when demand jumped as interest rates hovered at historic lows. A similar trend took place in the decade after the 2008-09 financial crisis when U.S. debt holdings effectively tripled from $2 to $6 trillion.
Driving this trend was China’s rapid purchase of Treasuries, which ballooned from $100 billion in 2002 to a peak of $1.3 trillion in 2013. As the country’s exports and output expanded, it sold yuan and bought dollars to help alleviate exchange rate pressure on its currency. Fast-forward to today, and global interest-rate uncertainty—which in turn can impact national currency valuations and therefore demand for Treasuries—continues to be a factor impacting the future direction of foreign U.S. debt holdings.
