Risk Latte - “Price to Pork” Ratio and Investment Rules

“Price to Pork” Ratio and Investment Rules

Rahul Bhattacharya
June 01, 2007


While going over an article* in Financial Times this afternoon we came across a curious reference to a very eccentric investment rule in China . Given the recent stock market frenzy in China , all kinds of weird and irrational investment rules are, apparently, coming into play. The concept being referred to in the article was something what we would like to dub "price to pork" ratio. If the price of a stock - in a Chinese company - is less than that of a kilo of pork there then it must be a good buy.

Is this "price to pork" ratio a better benchmark than "price to book" or "price earnings" ratio? Only equity analysts can tell.

On a saner note, we have recently came across a hedge fund in Asia which has for some time being following an asset allocation rule based on stocks and commodities. To start with - which we believe was about two years back - the fund manager had 25% invested in a basket of commodities - unfortunately, not in pork belly futures but rather in sugar, grain, coffee, etc. - and 75% in stocks indices. The 25-75 rule, in turn, was based on certain quantitative benchmarks and proprietary algorithms. In the model as the price of stocks and commodities move the asset allocation proportion also changes and sometimes changes rapidly. We do not know what the current asset allocation weights of stocks and commodities are.

We don't know much about the model or how the precise investment algorithm is arrived at. But apparently there is an factor based algorithm which takes into account the volatilities of the stock indices and commodity futures, the correlation between them, the yield on stocks and commodities and a couple of fundamental macro-economic factors which explain causality between stock price and commodity price movement.

But the fund manager confirmed this much: he believes that there are fundamental linkages between stock (indices) price movements and commodity price movements and detailed factor analysis (principal components analysis) can bring out some of them.

Looks like "price to pork" ratio as an investment benchmark might have some merit in it after all.


*Reference : Financial Times, page 13, Thursday, May 31, 2007 .

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