THE SEARCH FOR ALPHA IN INVESTMENT STRATEGY

Do you hedge against inflation or deflation? Some economists predicted a massive inflation surge from the money printing occurring in most major economies. Yet there is little evidence of it in the real economy for tradeable assets and services, and especially given the slowdown in China and other Asian countries. There is massive supply of underutilised capacity.

In those sectors, it looks as though investment strategy should be profiting from a deflationary environment.

That is not the case with non-tradeable assets in the worlds' two growth economies, being the United States and Germany. In some cities and regions, including California, New Zealand, and Berlin, real estate prices are inflating. Some years ago, I constructed the Deutsche Property Trust, and had a Term Sheet from Lehman Bros for USD 200 million. That was in 2007, so no guesses what happened shortly after.

Now, wherever you invest, you are investing in volatile conditions. That volatility creates opportunities, the windows for which could be quite short, and sometimes strategically and rapidly obsolete.

In the United States (where I have along predicted a resurgence in growth (please see my Ping Pong Pang blogs), the volatility is on the upside at present and in my view likely to remain so even if the money printing stops. This view stems from the US and Canada being able to source  and export their energy needs from domestic sources at lower than present world prices. There will  be a resurgence of manufacturing as the key strengths of the US economy build on this advantage.

Germany similarly, and whatever the present difficulties in the European Union, it is important to note that Germany is playing a long term game which is likely to result in more Europe rather than less (refer my blog on Joschka Fischer recently). Manufacturing and employment is growing strongly in Germany and this is now reflected in inflating real estate prices.

Generating alpha from opportunities in these two countries will be from upside potential including in the IPO markets.

Other countries, including Australia, will be on the downside, and include acquisitions of deflating asset prices, including some real estate. That is likely to continue for at least another year, and certainly until the political and economic mess in Canberra is resolved. Until then, the present socialist Federal Government has seen fit to destroy Australia's comparative advantages, disincentivise its entrepreneurial and aspirational workforce, and destroy the country's previously enviable fiscal position. Hence, every day, in most the mainstream press and commentaries, there are predictions of recession. Hello, I predicted it in these blogs nearly a year ago. Australia is looking more like France everyday.

Nonetheless, alpha is there to be earned, but on the downside.

Alpha generation is the true skill in private equity and hedge fund investing. But one size most definitely not fit all, and all investor presentations need to reflect that.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact Corpbuilders TM at www.corpbuilders.com.au