It's time for cannabis-related stocks. From Canada to the United States is an explosion of placements, dedicated private equity funds, passive ETFs and active funds. Above all, prices are exploding (and now volatility too), with the company launched by the only Republican tycoon in Silicon Valley, Peter Thiel, which in three months has more than tenfolded its value and which, with 2018 sales of 42 million, is already worth 20 billion.
Traditionally grown in the Appalachian region, wild in landscape and gothic in spirit, as a supplementary income from the clandestine distillation of spirits for the descendants of the Scots-Irish Presbyterians of Ulster who took refuge here two centuries ago, cannabis is now produced in many areas of North America and has rapidly industrialized and financialised. It has attracted talent and smart money, often from the same venture capitalists who have funded high tech and biotech. There is therefore a lot of managerial professionalism and there is also a high potential demand along the two lines of medical and recreational use. On the medical level, in particular, there are the millions of unemployed created by the 2008 crisis who were prescribed opiates on a large scale at the first back pain or cold and who developed serious forms of addiction, one of the darkest pages in history of medical practice in our time. Cannabis, its proponents hope, will be used on an equally large scale in detoxification programs as methadone for heroin.
Capital has migrated on the subject of cannabis, energies and interest also from the feverish universe of cryptocurrencies, today in a phase of ebb and bear market that recalls the post-bubble world linked to the Internet in the early XNUMXs. And it is precisely the cross stories of crypto and cannabis that give us the cue to return to the topic of thematic investments.
We go back also and above all because we hear them evoked with increasing frequency by sellside of the financial industry and because this frequency is, historically, an excellent indicator of a mature stock market cycle. There is not necessarily a particular malice in the consultant who proposes a topic. Generally it is reached by exclusion, that is, when, having sifted through the traditional sectors and geographical areas one by one and ascertaining that they are all expensive or almost there, one casts one's heart beyond the next recession and projects oneself onto secular themes which, today relatively marginal or neglected, will acquire centrality in the medium and long term. In short, in the eyes of those who sell and buy these issues, there is the idea that, even if the timing were to be wrong, any reduction following the purchase will not have to be lived with the anxiety of those who think they have wasted money , but with the patient and firm faith of someone who knows they are on the right side of history.
Mind you, investing by themes is often rational and profitable. Furthermore, the themes are always present in the market at any stage of the cycle. The alarm bell only sounds when themes become the prevailing or even exclusive style in portfolio choices, the ultimate refuge for those who no longer have faith in the market in general.
The themes, on the other hand, are secular in the real world, but they are subject to trends in the representation that the markets make of reality. Take the case of the stocks of companies that mine lithium and cobalt, two essential components of the batteries that will propel electric cars in the next 30-40 years at least. These stocks had an excellent rise in 2016 and in 2017, when it was understood that China would completely convert to electricity in the short term, but this year, even in the presence of a rise in the American indices, they continued to fall .
In short, the themes must be played out either as a fashion (and therefore on the momentum, but you have to be good and fast) or as a real secular phenomenon. In this second case, nothing forces you to buy everything right away and you can expect bear markets and recessions. This is especially true for those issues that warm hearts less, such as the progressive spread of diabetes or the growing demand for diapers for the elderly. Themes that are solid long seller like Hoepli's Sanskrit or DIY manuals, never top charts, but small gold mines over the decades.
On the other hand, nothing forbids, on the contrary, considering a theme when, alongside growth, it also incorporates value. Is this the case for emerging markets right now? Let's remember that the emerging ones are a perfect example of a secular theme long seller. With their growth rates typically double that of mature markets and with their young demographics, they should guarantee higher returns over time. In addition, both as currencies and as equity, they are now at much lower prices than at the beginning of 2018.
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In January, moreover, it was thought that the emerging countries would benefit greatly, like the rest of the world, from the acceleration of the US economy due to the tax reform. It was not considered that that same acceleration would induce the Fed to take a less accommodating position and thus push up the dollar (which almost everyone considered still weak at the beginning of the year). Rates therefore rose and the dollar strengthened. Hot international capital invested in emerging countries has returned home and many of these countries have once again found themselves too much indebted to ever more expensive dollars. The markets, which had tolerated and financed their current account deficits for years or decades, suddenly became nervous and began to demand ever more radical and rapid adjustments.
These adjustments have in fact already begun. Türkiye and Argentina are already in recession and they have undervalued coins. The current account deficit will close quickly, but this violent cure will leave behind bailout banks, debt restructurings, social malaise and political instability. At the moment the two countries have managed to stabilize the situation, but the recovery is not close and the sword of Trump's Damocles and his sanctions still hangs over Turkey.
The sanctions, present and future, hold Russia is also under pressure, which otherwise would be a good buying opportunity. The Russian macroeconomic framework has been described as good and very well managed by the IMF in its recent annual report, the banks are controlled with a firm hand and have no skeletons in their closet and growth is not strong but stable.
Politics is also a problem for Brazil, a divided country that could take radical paths, including, in the background, the hypothesis of a return to power of the military in the event of further prolonged instability.
For the time being, therefore, India and, to a lesser extent, China remain, as countries to consider for an investment in the short term. India has no new problems since the beginning of the year and has simply shrugged off the overvaluation of the rupee and the stock market created by the over-enthusiasm of international investors. Now the situation is balanced and therefore interesting.
China, for its part, has understood perfectly that the picture has changed and that the economic cold war with America will last a very long time. A new general strategy is being developed, there is awareness that the divorce of the American and Chinese production chains will characterize the next few years but there is no sign of panic. It's as if China has known for a long time that America will wake up sooner or later and that the party will be over. Now we will focus on stabilizing the exchange rate and the stock market. We will deal with the recovery of the stock market later, at the moment there are other priorities.
Coming to the short, we think that Trump's dream (in addition to Kavanaugh on the Supreme Court) and to be able to announce the SP at 3000 before the election. We don't know if the dream will come true, but it is likely that in the coming weeks everything will be done to restore dialogue with the Chinese and with Europe, two things that the markets would certainly like. European stock exchanges and the euro in gradual and shared improvement.
