“Dear David, I am an investor in Russian equities, lured by the historically and statistically cheap valuations (even by Russian standards). I have hedged this by shorting the RUB. Judging by the RUB chart, it is in Type 1, of indeterminate length. I've never seen a currency for an important country go through the roof like this. While it is human nature to extrapolate this higher, I know from TCS that Type 1 is trend ending. At what point would you suggest the RUB depreciation is overdone and no longer tied to the fundamentals? Are there any intermarket charts that could shed some light on when to cover the RUB short? As always I appreciate the insightful commentary, but no time is it needed more than now as I have real money at stake here! Thanks.”

David Fuller's view

Well, you know my view on Russia, but you also have my sympathy because investing can certainly be challenging, and every single one of us has clangers, without exception.  Fortunately, we can learn from our mistakes.  Valuations are obviously extremely important.  However, if a country’s market is extremely undervalued, there must be a reason.  For instance, if it is tight monetary policy, then there must be a good chance that it will be followed by easing.  Better still, if all stock markets are historically cheap, it is probably a bear market near its eventual lows, and a great medium to longer term buying opportunity.  However, if a market is a valuation standout and not because of monetary policy or threats from other countries, then the chances are that governance is a serious problem, leading to this service’s mantra: Governance Is Everything. 

Fortunately, you were smart to hedge short the Ruble.  So how do we deal with the Type 1 trend ending characteristic that you recognise? 

Your first question is about assessing RUB on the basis of the fundamentals.  That is very subjective because Putin is dangerous and has turned his country into a pariah state.  Your second question takes you away from RUB, for an example which may be irrelevant and no better than a coin toss. 

Remember, TCS talks about trailing stops.  At minimum, a trailing stop would lock in at least a portion of your hedge profit.  You have recently seen a reaction of just under 5 RUB before the currency resumed its decline.  That is the first example for everyone else trading RUB of ‘an acceptable’ correction which does not change the trend.  There is no other relevant technical criteria, in my opinion.  So I would have a 6 RUB trailing stop, and only tighten it in the even of another big devaluation.  

Meanwhile, the good news is that you know Russia’s RUB would strengthen and the RTSI$ Index in which you have invested, probably double or more within eighteen months, if Putin was replaced by anyone other than another ex-KGB hack.  Good luck.