If your hobby is spotting bearish data points, you got to tick a lot of boxes in your little black book last week. The 10-year US Treasury yield plunged to levels not seen since April of last year. The dollar swooned, the price of gold raced skywards.

We are in a real soft patch

Not long ago this kind of thing might have been dismissed as the sort of sentiment-driven volatility that we have become used to in the first weeks of 2016. But the fact is that a lot of fundamental economic data has disappointed recently, too. Aggregated indicators of global economic fundamentals such as the Citi Economic Surprise Indices have dropped to multi-month lows. We are evidently moving through a real soft patch in the global economy, a slowdown more severe than most people anticipated.

For some, these are the early indications of a coming global recession, the end of a business and credit cycle that has already lasted a very long time by historical standards.

We disagree. Let’s take one set of indicators that got a lot of attention in the middle of last week: the Institute of Supply Management’s Purchasing Managers’ Indices (PMI), which are taken as a gauge of confidence in the business sector. The US manufacturing sector PMI has been contracting for some time and many were looking fearfully for any sign that the non-manufacturing index was following suit. Sure enough, Wednesday’s reading came in much lower than expected.

No imminent recession

But that index is still above 50 — that is, it’s still in growth territory. As such, the composite US PMI is still indicating economic growth, as is the global version of the index. And, lest we forget, US unemployment is under 5 per cent and still falling, with another 151,000 jobs added in January. The S&P 500 Index may have given up some value last week, but the price of oil actually recovered significantly from its recent low levels. With so many contradictory signals, it is not easy to determine which we should be looking at.

The Multi-Asset Class team remains in the camp that says we are not yet at the end of this cycle. We are reminded of a similar mid-cycle correction in 2011.

During that episode the S&P 500 dropped by around 20 per cent, peak-to-trough, so these can be very painful experiences. As a result, we are being very cautious in our short-term outlook.

But on a 12-month basis, we maintain our modest risk-on bias, and in fact, we have become even more confident in our medium-term return outlooks, given the sell-offs that we have seen.

New opportunities

We think that this slowdown will eventually offer some attractive entry points to add risk to portfolios, particularly in parts of the credit markets. The key word, of course, is “eventually.” Given the recent poor data we will certainly need to see some manifestation of the increase in credit defaults that has been forecast, and some re-ratings of BBBs to BBs, before we feel that things have truly bottomed out.

The same applies to what’s happening with oil: We want evidence of real production cuts from a marginal non-OPEC (Organisation of the Petroleum Exporting Countries) player (or even an OPEC producer), signs that the rig-count and capex declines in the US are leading to reduced production. Once these things are built into the environment — possibly by the coming summer — we think it will be an opportune time to consider adding risk.

Until then we are watching carefully for any further signs of deterioration. We still worry most about China, and any significant further decline of the yuan would be the signal to revisit our thesis. A 10 per cent-plus devaluation would suggest that China may be going through a “hard landing,” potentially triggering currency wars and global deflation.

This is far from our base case, however. Our watchword is caution — but caution in scouting for opportunities over the coming months.

— Writer is Chief Investment Officer — Multi-Asset Class, Neuberger Berman