Original article by Alastair Ford of Proactive Investors, published 04/05/20

Cannabis legalisation will be a likely response to the UK’s upcoming desperation for tax revenue, with concomitant opportunities for investors

It’s not exactly the circumstances envisaged by Peter Tosh, the great Rastafari singer who famously agitated for the legalization of marijuana in his hit song. 

But given his assertion that it’s good for treating flu, asthma, tuberculosis and an unidentifiable condition called “numara thrombosis,” he would probably have appreciated that the world’s biggest medical emergency for several generations looks like providing the context for the final push towards full legalisation in the UK.

Medial use has already, although only comparatively recently, been allowed. Sajid Javid, the then home secretary, argued at the time that medical use was as far as the government was ever likely to go in terms of legalisation.

But times change, and so do home secretaries.

In this case, it will be the former rather than the latter which will be the crucial factor.

Because when Javid was making his strong pronouncements the UK economy was chugging along, albeit not very strongly but at least within margins of error allowed for by most reasonable forecasters.

Now, five months into 2020, the economy has been blown so far off course it has, to all intents and purposes, lost sight of land completely.

What can the government do about this? From the point of view of the government itself, there are two related, indeed inextricable factors to consider. The first is that debts, and consequently the burden of debt servicing, are going up. To cover those higher debt service charges will require, in theory, more revenue.

But this leads us on to the second issue which is simple enough in its own terms: by putting much of the UK economy on hold and subsidising a good portion of the rest, the government’s own tax income from economic activity looks set to plummet.

Anyone with half an ounce of common sense in the Treasury will be looking around for new sources of potential revenues, and particularly ones that will be easy, and possibly even popular.

That last factor isn’t one that generally applies to new taxation, but the narrative framework around legalising cannabis could quite easily run along those lines. Rather than a revenue-raising exercise, a blanket legalisation could be spun as a government looking to rationalise an aspect of the criminal justice system that clearly isn’t working, whilst also dispensing with an outdated image of itself as overbearing and disapproving of peoples’ desires to have a good time.

Safety issues around illegal growing techniques could also be addressed, and clear guidance could also be given on the potency or otherwise of various products. The associated revenue from taxation, as far as any policy announcement was concerned, could thus be hidden some way down the list. Except in the financial press, where it could be talked up. Meanwhile, the words of Mr Javid, could be quietly forgotten, as the pronouncements of most politicians generally are.

What does this mean for investors?

Well, the UK business community is to some degree already involved in the Cannabis business. British Sugar, a subsidiary of Associated British Foods (LON:ABF), has been growing cannabis under licence since 2016, after phasing out its tomato growing facilities in Norfolk.

The company works in conjunction with GW Pharmaceuticals (NASDAQ:GWPH) and sells into the USA and a variety of other jurisdictions where cannabis is already legal.

So looked at from that perspective, the UK isn’t particularly behind the curve, although the number of companies participating isn’t that large.

Nevertheless, a full-blown legalisation of across the board use is likely to lead to significant further opportunities for businesses and the investors who back them.

For proof of this one only has to look across the pond to Canada and the US, where the boom in the cannabis sector was so significant that it’s no exaggeration to say that it all but completely sucked the local mining sectors dry of capital.

In the UK mining occupies a slightly different sort of niche as far as investors are concerned, and companies that have made a success of operating locally are few and far between. It’s also true to say that the mining sector has anyway been starved of capital for a good few years now, and might not necessarily notice if a cannabis boom started attracting in significant new amounts of money.

What might be more realistic is that the coronavirus might be some time distant by the time the legislation makes it through parliament, and that the current wave of speculative interest in the biotech sector that we are witnessing today will be wearing off. Where will all the speculative money go then? Answer, out of biotech and into a new sector for the UK’s investors to explore, cannabis.