Cannabis Market Forecast: 5 Top Trends That Will Affect Cannabis in 2023

What are the 5 top trends that will affect cannabis in 2023?

1a. US political uncertainty set to continue

Politics plays a gigantic role in the progress of the US cannabis market, meaning investors are accustomed to following developments in Congress. In 2022, expectations were high for the arrival of meaningful banking reform, which could unlock further potential for existing companies and allow for a healthier financial situation all around.

However, stakeholders have found themselves in limbo yet again. With less than a month left in 2022, lawmakers are still hashing out whether the Secure and Fair Enforcement (SAFE) Banking Act can be included in some form of legislation before Republicans take over control of the House of Representatives in 2023.

“If (Democrats) really wanted to find common ground, I think there was time over the last two years where they could have done that,” Charles Taerk, president and CEO of Faircourt Asset Management, told INN.

1b. Select MSOs to see higher cashflow

Given the fragmented nature of the US cannabis market, picking stocks is often tricky. Since the drug remains federally illegal, companies and investors alike must be aware of the rules and requirements for different state markets.

“You've got to look at companies that are executing well,” Taerk said.

The fund manager, who is responsible for the Ninepoint Alternative Health Fund, pointed to operators such as Green Thumb Industries (CSE:GTII,OTCQX:GTBIF) and Trulieve (CSE:TRUL,OTCQX:TCNNF), saying they are well positioned at the moment.

“They're in a great position — strong balance sheets, efficient operations — to generate higher margins,” Taerk explained to INN. “That's why we tend to focus on some very few names.”

In particular, Taerk pointed to an evolution in the finances of the multi-state operators (MSOs) he covers. There’s an expectation for an end to capital expenditure programs, which would result in “significant cashflow increases from these companies.”

“If you just think about their sales and their cashflow previously, a lot of money was going to capital expenditures," he said. "Now the operating cashflow that's going to be generated from these businesses is going to be substantial."

2. All eyes on New York adult-use sales

Experts are calling for many more state markets to come online in 2023. Undoubtedly the one that will capture a lot of headlines will be New York, which will kick off regulated adult-use sales.

Mark Sims, CEO of RIV Capital (CSE:RIV,OTC Pink:CNPOF), an American operator with a keen interest in this market, told INN that the opening of New York has the potential to upend the status quo in the cannabis market.

Operators in New York’s existing medical market are expected to add recreational options as well, Sims said. However, the state regulator is prioritizing entrepreneurs and nonprofits for the first 36 provisional licenses.

Despite this excitement, some experts are already pointing to warning signs for investors thinking New York will be a significant market for MSOs. “Because it's a state-by-state market, certain states have more regulatory issues — higher taxes are really a competitive disadvantage for those operators that are in those states,” Taerk said.

The New York cannabis market, according to Sims, is facing competition from a thriving black market. That issue, coupled with some odd regulation decisions, may mean that New York is not exactly what investors want it to be.

“It's going to be challenging for those that have put all their eggs in one basket … the challenge is, if any of (the MSOs in New York) expected New York to be a 2023 growth story, I think that's going to be put off,” Taerk said.

When asked about additional states to keep a close eye on, Taerk said investors shouldn't dismiss smaller states given their more favorable regulatory models. "Those companies that have significant exposure to the west coast are seeing more difficult operating issues versus companies that are operating east of the Mississippi," Taerk said.

He highlighted states like Illinois and New Jersey, as well as medical states like Pennsylvania and Ohio, "where the regulatory environment has limited licensing, and prices are not as competitive and the companies actually have the ability to make money."

3. Impact of inflation coming home to roost

Inflation is affecting virtually all industries, and in cannabis it's impacting spending patterns as well prices.

“We know consumer wallets have tightened. We know consumer spending, at least discretionarily on the cannabis side, has come down,” Nawan Butt, portfolio manager with Purpose Investments, told INN.

According to the financial expert, changes in spending patterns are playing a part in a larger adjustment of the fundamentals of the cannabis investment thesis. However, Butt views these changes as a blip rather than the new normal. “Cannabis has been, as a theme, struggling already to gain any traction, especially with the overhang of this regulatory reform,” he told INN.

The manager of the Purpose Marijuana Opportunities Fund (NEO:MJJ) said spending is expected to bounce back in 2024. But before that turnaround can arrive, there may still be some more losses on the horizon, according to one market expert.

“It's very important to recognize that cannabis is an emerging frontier market,” Rami El-Cheikh, a strategy partner and cannabis lead with EY-Parthenon, told INN. “The next 12 months are going to be very difficult,” he continued. “If you think about this industry, this is the first time it is facing all the macroeconomic forces that all other industries are facing.”

Despite the challenges these broad trends are creating, Taerk told INN they are allowing some US companies to stand out.

“Within that, there are certain operators that are doing quite well because they have operational scale,” he said. “With their efficiency and operation, they're able to withstand some of the inflationary pressures that general consumer stocks are facing. There's really a separation that we're seeing, because there are some companies that are able to deal with it.”

Taerk said these market trends are providing a way to differentiate what he sees as the "haves" and the "have-nots" within the cannabis market. “There are others that are still challenged, because they're still building. If they don't have their houses in order, there's too much growth over a short period of time. They're having to look at some rationalization,” he said.

4. In Canada, it’s all about survival

The outlook for the Canadian cannabis sector continues to be tricky. While companies have enjoyed a greater ability to obtain capital thanks to senior listings, the market's limitations have curbed financial interest from investors.

As such, the Canadian industry will be defined by those that make it through a difficult period of foreclosures and bankruptcies.

“When you see players going out of the market, that creates opportunities for others that are able to survive and steal their market share or gain their market share,” El-Cheikh said.

One cannabis investment fund manager said he thinks there’s still work to be done in terms of scaling back the abundance of growing facilities and retail distribution points in the Canadian market.

“There's got to be a rationalization here, because we overbuilt,” Taerk told INN. He suggested that investors look at Village Farms International (NASDAQ:VFF), whose know-how in the agriculture space makes it a safer bet.

When it comes to reasons to be optimistic about the progress of Canadian operators, El-Cheikh told INN he is going to be closely watching the development of opportunities for local companies in markets abroad, particularly in Europe.

5. Progress in Europe to diversify market

The cannabis potential attached to Europe has long been debated, with market participants questioning how available it will really end up being for current cannabis operators. Germany is seen dictating the conversation around legal cannabis in Europe as expectations rise for the potential approval of adult-use sales in 2023.

“Germany has pretty much fast forwarded and expedited their rules and regulations around cannabis,” Butt said.

According to Germany’s health minister, Karl Lauterbach, the country wants to adapt from the more open model found in the Netherlands. “What we have learned from the Dutch experience is that we don’t want to do it that way,” he said, according to a report. “We want to control the entire market.”

Encouragingly, some European nations have looked at what Germany is doing and announced their intentions to follow suit.

This movement is helping to add momentum in the cannabis market, Butt said, since it's changing the perspective that the US and Canada are the only storylines in the industry. “We're starting to see deeper penetration in different parts of the world, and that is very encouraging for cannabis fundamentals,” he said.