Cannabis investments blazing in Brazil

. Dec 04, 2019
cannabis investments Image: iQoncept/Shutterstock

The use of cannabis for recreational purposes remains taboo in Brazil, with the majority of the population still against legalizing the drug. However, regulators are slowly changing the landscape of medical marijuana. A ruling from Brazil’s Sanitary Surveillance Agency (Anvisa) allows companies to produce and sell cannabis-based medications, including in pharmacies. Growing cannabis remains off-limits, however, forcing companies to import the plant extract, requiring high investments and favoring Big Pharma.

</p> <p>But regardless of its limitations, this new ruling should further boost investments in the cannabis market—which have silently been creeping up in recent months. Since October, Brazilian asset management firm Vitreo has launched not one, but two investment funds focused only on projects concerning cannabis—becoming the first firm to do so.&nbsp;</p> <p>At first, Vitreo&#8217;s Canabidiol FIA IE was created to invest in overseas companies, which, according to the rules of Brazil&#8217;s Securities Commission (CVM), makes it available only to corporate investors. To cater to an overwhelming demand from retail investors, Vitreo created Canabidiol Light FICFIM shortly thereafter. &#8220;It puts 20 percent of its capital in the first fund, and 80 percent on public bonds—a very conservative approach,&#8221; explains George Wachsmann, chief investment officer at Vitreo.</p> <p>As of November, both funds had roughly 2,400 investors combined and a net worth of BRL 30 million.&nbsp;</p> <p>Canabidiol FIA’s portfolio is quite diversified: half is invested in the most famous marijuana exchange-traded funds (ETFs)—Horizons Medical Marijuana Life Sciences and ETFMG Alternative Harvest ETF—and the other half is spread among companies such as Canada&#8217;s Canopy and Aurora.</p> <p>The strategy is to have a broad portfolio with the most diverse opportunities. “Perhaps it is better to surf the wave of the booming industry as a whole than just hit the most promising asset,” says Mr. Wachsmann to <strong>The Brazilian Report</strong>.</p> <h2>A hotbox market</h2> <p>A market as disruptive as cannabis is not for the faint of heart. So far this year, the North American Marijuana Index, which includes 45 cannabis-related companies listed in the U.S. or Canada, went from a 49-percent gain in March to a 43-percent <em>loss</em> six months later.</p> <p>Largely comprised of startups and exposed to <a href="">regulatory changes,</a> the cannabis market might be too volatile for <a href="">uber-conservative Brazilian investors</a>.</p> <p>“The fund has oscillated a lot. Last week, it was down, and many of our investors got scared. That&#8217;s why we suggest people allocate only a small part of the share they put into riskier assets. The cannabis market can&#8217;t be seen as the next lottery ticket,” warns Mr. Wachsmann. He adds that cannabis-related investments should be for the next five or ten years.</p> <div class="flourish-embed" data-src="visualisation/1001837"></div><script src=""></script> <h2>The grass is always greener&nbsp;</h2> <p>Investing in financial markets abroad is, so far, the only opportunity Brazilians have to enjoy the boom of the cannabis industry. But despite the regulatory limbo, Brazil has been in the sights of foreign companies.&nbsp;</p> <p>In 2019, Spectrum Therapeutics, a pharmaceutical unit of Canopy, the global leader in cannabis-based products, invested BRL 60 million into a unit in São Paulo. At first, it focused on providing training for health professionals and R&amp;D. But, as Spectrum’s national manager Jaime Ozi told magazine <em>Época Negócios</em>, investments could get hefty if the business environment were more friendly.</p> <p>“We’re currently investing USD 90 million in Colombia right now. We could be doing the same in Brazil if legislation allowed the production of (cannabis-related) medicines”, he was <a href="">quoted</a> as saying.</p> <p>As we published in our <strong>Daily Briefing</strong> on <a href="">November 27</a>, the cannabis market already accounts for BRL 9.6 billion in Brazil, including the legal and <a href="">illegal imports</a> of medicinal marijuana products. It has the potential to quickly become a BRL 45-billion market—with 1.7 million patients around the country that could benefit from these products.</p> <p>Besides patients and investors, the cannabis market could benefit another stakeholder: the government. A 2016 Congress <a href="">study</a> estimates tax revenue from cannabis sales could reach BRL 5 billion if current consumption levels remained stable—or BRL 5.9 billion if consumption grows by 17.5 percent after legalization, applying the same taxes that incur on cigarettes.</p> <p>Meanwhile, Brazil would stop spending BRL 997 million to keep people convicted of marijuana-related charges behind bars. Using 2014 data, the study also concludes that there would be no significant change in the amount spent on health treatments for substance abuse related to cannabis, estimated at BRL 6.2 million.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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