Could Low Volume Signal an Inflection Point?

On May 25, trading volume on the TSX was 15.8 million. The two last weeks of May showed a slightly higher average of around 17 million shares traded. However, comparing to the same period in 2021, it is clear that volumes on the TSX are way off. By over 75% to be precise, as two years ago the daily average trading volume was around 117 million shares.

Low liquidity is not good as it makes it harder for people to get in and out of stocks without impacting the market too much. If you have two million shares to sell and average daily liquidity in your stock is 100,000 shares per day, it would take you twenty days to cycle out of your position completely, assuming no one else is selling. That is unlikely, so you will either need to take longer, or accept that when you start hitting the bids, the stock will crash.

So while low volume is not great, I believe that what we are seeing currently may actually be a sign that we have hit an inflection point. While volumes are low, selling pressure appears to be low too. To me this signifies that people are comfortable with the direction/outlook for the companies they are invested in and are not willing to exit at these depressed levels. With limited active selling, the downward pressure on the stock is reduced and if buying does come in, a recovery will be more rapid and easier. Applying this to the entire market, I think we may be hitting a point where risk capital will start to flow again.

There are a number of sectors I believe will recover more quickly than others. IN particular, those sectors that serve unmet needs or rapidly expanding industries. Critical minerals is one good example. The EV revolution requires large quantities of critical minerals such as lithium and graphite. Both are in short supply. Nickel, cobalt, scandium are other metals that will be in high demand.

Outside of the EV revolution, there are other sectors that meet pressing needs. Safe supply, or harm reduction related to drug abuse and contaminated supply leading to an acceleration in the death rate, is one such sector where a relatively new but evidence-based approach is set to make a big and positive impact on the $49.1 billion dollar problem we have (this number reflects the cost to society from drug abuse and includes costs for healthcare, emergency response, enforcement, etc).

Psychedelics, we believe, are slated for a comeback based on the fact that this sector is science/evidence based and is set to massively improve mental health treatment outcomes. The WHO estimates that by 2030 the global economy will be hit to the tune of about $6 trillion by the impact of mental health issues. Current treatments achieve around 20% efficacy rates. Psychedelics promise to increase this rate by a factor of over 3 with evidence pointing at a greater than 60% efficacy rate. It is clear that this class of new drugs that is currently being developed (ketamine already is FDA approved for certain indications and other FDA approvals are expected, while in Australia the TGA has already approved MDMA and Psilocybin for PTSD and certain other indications) has great potential and we expect to see this reflected in the market.

Finally, we believe that ESG related offerings with a strong value proposition will do well. With environmental concerns increasingly a key element in a buyer's journey, companies are taking note and have started to substitute materials, incorporate cleaner technologies or are committing to offsetting through credits. It is especially the latter where we see early momentum. New exchanges are being launched to facilitate the trading of credits. Only a few will get it right, but financial incentives still talk louder than most other arguments and credits are the type of instrument that can easily be adopted. Furthermore, credits form a new asset class that will attract investors who are not looking to offset but rather are looking to hedge or benefit from future value increases (we are already seeing this with End of Life Plastics credits, launched by Changeblock in collaboration with FusionOne, with credits gong from $100 per tonne to $250 per tonne).

So overall, while low volumes typically are not a good sign, we believe we may be nearing that inflection point and it is time to start asset shopping and look forwards and upwards again