Market review

Global growth is strong at 3.5% and is accompanied by low unemployment and improved consumer and business confidence. A notable feature of the improvement in global real economic activity in 2017 is the increase in fixed investment spending, amidst an upturn in business profits. The US economy remains resilient and on track to exceed 2% growth this year. This is in large part being driven by manufacturing production, which is at a thirteen-year high and is being assisted by strong export orders. The unwinding of the US reflation trade has put pressure on the US dollar and has helped emerging market currencies, including the rand. Emerging market bonds have seen the best inflows in six years. The rebalancing of the Chinese economy continues with strong double digit growth in retail spending while investment spending growth is slowing down into the single digits. The Chinese services economy is growing faster, attracting three quarters of fixed investment into the economy. Global markets have remained buoyed by the $1.7 billion central bank injection this year and 13% increase in earnings growth. We have seen the fourth strongest bull market in the history of the US market with the S&P up over 250% since 2009. If the S&P posts a positive month in October then the Trump-fueled US rally will equal a 90-year record! The concern remains that, with the VIX or fear index at a record low, global investors are much too complacent at the moment. Hurricane Harry caused some damage at the end of August to the oil producing areas close to the Gulf of Mexico, lending some support to the oil price. But the greater threat must be the escalating tensions and the ‘war of words’ between the US and North Korean leaders with South Korea, Japan, China, Russia and other European nations all intricately involved. The risks associated with this stand-off between the US and North Korea are unlikely to dissipate soon. Back on the home turf, we are seeing some recovery in real economy data, with the increase in electricity demand and positive vehicle sales growth being signs of marginally positive GDP growth after two consecutive quarters of negative growth. We are importing deflation with prices dropping 10% year-on-year and a much improved terms of trade assisted by a recovery from last year’s drought. This has driven the trade balance into positive territory. Concern remains that hefty hikes in electricity rates and taxes next year could stall a consumer recovery. In addition, politics continue to dominate the headlines for all the wrong reasons with the motion of no confidence on the President held by secret ballot in August further fueling speculation of a fiercely contested policy conference by the ruling party in December. Political uncertainty and recurring evidence of corruption, with the latest episode casting serious doubts over the integrity of audit firm KPMG, continue to weigh down on consumer and business confidence. All of this is likely to translate into low economic growth of below 1% this year. It is clear that a potential sovereign risk downgrade is weighing on real rates, which are at 1.5%, when the weak economic data would suggest that lower real rates would be applicable. Against this backdrop, the fact that rates were not cut at the end of September was a missed opportunity.

The rand weakened over the quarter from R13.10/$ to R13.50/$ at the end of September. The benchmark SA 10-year bond yield declined from 8.77% to 8.55% over the quarter. This move was supported by SA’s high real yields, expectations of a lower inflation trajectory into year-end and the global backdrop. The SA Reserve Bank (SARB) surprised the markets by delivering a repo rate cut of 0.25% to 6.75% at its July meeting. The decision was supported by inflation reducing from 5.4% to 5.1% in June with further moderation expected. The SARB was also surprised at thevery weak growth outcome of the first quarter of -0.6%. In an unexpected move again, the SARB’s Monetary Policy Committee (MPC) left the repo rate unchanged at 6.75% at its September meeting with three of its members voting for a cut, and three members voting for unchanged rates. The MPC’s tonality was hawkish and, although unanticipated by the market, does confirm and complement its basis of data-dependence. Given the possibility of further credit rating downgrades, growth disappointments, further political uncertainty and a potential impact on the currency and foreign capital flows, the SARB would be loathe to cut too aggressively to prevent compressing real rates. The combination of low growth and low inflation breeds an environment conducive to interest rate cuts. However, we believe that the current loosening cycle will remain shallow and this, together with a lack of confidence on the part of consumers and businesses, is unlikely to boost growth meaningfully. The front-end of the yield curve re-priced aggressively higher, leaving the curve flatter after many months of steepening. For the quarter to September, nominal bonds returned 3.7%, cash returned 1.8% and inflation-linked bonds added 1.2%. On the international front, the MSCI Emerging Market Index was 8.0% firmer in US dollar terms while the MSCI World Index returned 4.8%. Locally, the FTSE/JSE All Share Index rallied strongly to deliver a return of 8.9% on a total return basis with SA Resources 17.8% higher, SA Industrials up 7.4% and SA Financials 5.1% higher over the quarter.

Asset allocation
We retained our position in conventional bonds as the asset class offers an approximate 3% real yield, which is attractive when compared to domestic bonds of similarly rated countries. Inflation is under control and well within the target inflation band. Cash continued to be enhanced over the quarter via the addition of good quality select credit assets at attractive yield pick-ups over money market rates.

Gross equities exposure was higher over the quarter with effective equities exposure little changed. Given estimates of earnings growth, the SA equity market currently trades at a 15 times one-year forward price earnings (PE) multiple. Naspers now makes up 21.2% of the FTSE/JSE Shareholder Weighted All Share Index (SWIX). If we exclude Naspers, then the forward PE of the market is about 13. Based on this, the SA equity market is fairly priced. This is further supported by the bottom-up valuation of the SWIX, where we aggregate the fair values of its constituents as calculated by our SIM analysts. The higher expected prospective returns are due to the improved earnings prospects of the resources companies given higher commodity prices; the derating of companies with domestic earnings; and an increase in the valuation of Naspers, given earnings surprises from Tencent, its largest holding.

Globally we maintain our preference for equities and property over fixed income assets, with a favourable bias to European assets from a relative valuation perspective.

Investment strategy
In August we changed our view on the potential returns from bonds over the next six and 12 months. We increased the real returns required from bonds from 2% to 3%. The higher risk premium is driven by high political risk in the short term and a deteriorating fiscal position in the medium term. In October the Finance Minister will deliver his first medium-term budget policy statement. The market will be looking for confirmation that the bailouts of SAA will be deficit-neutral and where the savings have come from. In the first five months of the fiscal year revenue has tracked 15% below expectations. The market will be looking to the minister to adjust spending to take account of the new realities. There will be little adjust spending to take account of the new realities. There will be little tolerance for much wider deficits than those tabled in February. Deficits approaching 4% will hasten rating downgrades.

Against this backdrop, South African conventional bonds offering a real yield of close to 3% seem fairly priced and continue to offer a favourable yield when compared to domestic bonds of similarly rated countries. We remain of the opinion that local fixed-income assets are still an attractive investment to consider within the global context of a low-yielding environment. Locally, we see real yields of between 2% and 3% on offer against a backdrop of a declining inflationary environment. That said, although local bonds are attractively valued, we believe that they could offer better value into year-end given the risk events at play. Nominal bonds are preferred to inflation-linked bonds on a relative value basis.

We believe that the SA equity market is selectively attractive and offers decent upside from current levels. However, given our goal of protecting client’s capital over a rolling 12-month period and the increased sensitivity of our funds to capital drawdowns, we continue with our strategy of protecting a fair portion of our local equities via derivative overlays. Internationally, US markets are overpriced on most valuation metrics while European equities remain cheap on several key valuation measures relative to developed market peers. We therefore continue to be favourably positioned with respect to Europe within our global equity and property allocation.

Equities
The FTSE/JSE All Share Index (ALSI) bounced back strongly in the third quarter of 2017 with a return of 8.9% quarter-on-quarter after a mildly negative showing of 0.4% in the prior quarter. Within equities, SA Resources rose 17.8%, SA Industrials increased 7.4% and SA Financials were 5.1% higher over the quarter.

The General Miners were up 28.8% during the quarter, driven by positive data from China and a rebound in commodity prices. This helped drive Anglo American up 42.2% after delivering strong half-year numbers. Kumba Iron Ore was 39.8% higher on the back of strong interims and a rebound in the iron ore price. With billionaire Anil Agarwal boosting his stake in Anglo American by $2 billion and BHP Billiton the subject of corporate activists, there is increasing pressure on mining houses to deliver value to shareholders. There were, however, contrasting fortunes for the precious metal producers. Good numbers from Gold Fields, driven by its Australian mines, saw the share price soar by 32.2%. On the downside, there were disappointing results from Implats, which saw its share price drop by 15.9%. The spectre of electric vehicles continues to weigh on sentiment around platinum stocks, despite a complete phasing out of diesel cars and the combustion engine being some years away.
The SIM houseview portfolio delivered returns of just over 7% this quarter, marginally beating its SWIX benchmark in difficult conditions. Year to date this outperformance aggregates to 1.5% relative to the SWIX. A notable positive contributor to fund performance over the quarter was Naspers, our largest holding, having posted a return of 15% after delivering solid numbers. Globally there is positive sentiment towards IT stocks and Naspers’ investment in Tencent, the Chinese internet company, continues to drive the share price higher. Naspers continues to reshuffle the rest of its portfolio, which is being priced at a negative implied value by the market, unbundled its stake in the local printing business Novus and increased its stake in European company Delivery Hero. Old Mutual, one of our largest positions in the financial sector, was up a pleasing 9.1% with the managed separation of the group early next year taking shape. The group is focusing on a separate listing of its UK wealth business, which would help re-rate the counter. A detractor from performance was MMI holdings, which was down 9.8% after reporting disappointing results with weak performance in group risk and poor persistency in the retail business, resulting in very weak sales. This has led to question marks around the sustainability of the group’s high dividend yield. Steinhoff International disappointed with the share price coming off 10.5%, once again afflicted by unsubstantiated accusations of malpractice in Europe. The market shrugged off the successful listing of its African retail businesses, STAR, at the end of September, which added R16 billion to its coffers and should have resulted in a re-rating of the rest of the group, which is now trading on a single earnings multiple and operates mainly in developed markets. SIM equity strategy The fund has positions in companies with geographically diversified footprints, with a strong rand hedge component and that dominate their respective industries, such as Naspers, British American Tobacco and Steinhoff international. Many positions are in businesses with self-help stories at play and where the value unlock is within management’s control. An example of this is the managed separation strategy at Old Mutual Plc. As value investors, our focus remains on accumulating stocks where valuations are well below their intrinsic value as a result of other investors getting overly bearish.

Equity outlook
Given estimates of earnings growth, the SA equity market currently trades at a 15 times one-year forward earnings (PE) multiple. Naspers now makes up 21.2% of the SWIX Index. If we exclude Naspers, then the forward PE of the market is about 13. Based on this the SA equity market is fairly priced. According to a bottom-up valuation of the SWIX, where we aggregate the fair values of its constituents as calculated by the SIM analysts, SA equities are undervalued. This is as a result of: 1. improved earnings prospects of the resources companies given higher commodity prices; 2. the derating of companies with domestic earnings; and 3. an increase in the valuation of Naspers, given earnings surprises from Tencent; which is its largest holding.

From a pragmatic perspective we acknowledge that there is a clear element of myopia ruling our markets at this point in time. Short-term news and lack of investor confidence have an amplified impact on the markets and there is a clear aversion to bad news. Counters which have delivered results below expectation are being marked down heavily and a number of former market darlings have suddenly been marked down by investors. For instance, Brait, which was seen as a proxy to investing alongside billionaire Christo Wiese abroad, is down 38.1%, while Wiese’s other investment, Steinhoff, is also down 15% year-to-date. If we contrast the fortunes of overseas markets to our market, it is clear that investor confidence is an important behavioural factor driving investment markets. As value investors, our investment process is geared to protect our clients’ capital and exploit such opportunities by focusing on the long-term fundamentals.

International
Available data shows that the global economic expansion continued in the third quarter with real GDP growth around a trend-like 3%. In the US, the Fed kept interest rates steady but announced its decision to begin the process of balance sheet normalisation from October. Economic activity remained robust with healthy retail sales growth and consumers supported by the continued job creation and increasingly significant wealth effects on the back of the equity market rally and steady growth in average house prices. President Trump’s proposals for significant tax cuts created excitement in the last week of September. Although scant on detail, the proposals promised to simplify the tax code, drop the corporate tax rate, primarily benefit lower and middle income households and businesses among a host of other promises. The market reacted very positively to the news! The Eurozone gained further momentum, led by a resurgent industrial sector, with some support from consumer spending. The European Central Bank kept interest rates unchanged in September but President Draghi countered this dovish move by stating the Governing Council will be deciding on the future of the quantitative easing program in October. In Germany, Angela Merkel was re-elected as Chancellor, but the CDU/CSU and SPD parties experienced material loss of support as the euro-sceptic/right-wing AfD Party gained ground amongst voters, implying a coalition government will need to be formed. Amongst emerging market economies, available data suggests China’s growth momentum slowed in the third quarter, illustrated by a material decrease in the country’s net trade balance, amidst relatively less supportive domestic fiscal and monetary policies.

For the quarter in dollar terms, the MSCI Emerging Markets Index (MSCI EM) recorded a return of 8.0% while the MSCI World Index returned 4.8%. This brings total MSCI EM outperformance over the World Index for the 12 months to September to 4.3%. Global bonds as measured by the Bloomberg Barclays Capital Aggregate Bond Index rose 1.8% over the quarter. The local currency closed the quarter at R13.50 to the US dollar from R13.10 at the end of June. After savouring a period of relative stability the rand weakened over the latter part of the quarter mostly driven by shifts in investors’ perceptions of the major currencies, given the rising expectations that most major central banks will be starting to normalise their monetary policies after more than a decade of having extraordinarily stimulatory measures.

Looking to our international universe, we retain our preference for international equities, in particular European equities, from a relative value perspective, as well as select international property stocks. The US market looks expensive on most valuation measures such as Tobin's Q ratio (EV/replacement value), stock market capitalisation to GDP ratio and the Shiller PE ratio, which are all at about 1.5 times their standard deviation above their long-run average values. Even though European equity markets have performed well relative to the MSCI World Index, using valuation measures such as forward PE, Shiller PE and price-tobook ratios, Europe is still a fair degree cheaper. We therefore retain our overweight Europe position in our global equity portfolio. Our select global property exposure currently has an average dividend yield of 5.5% which remains attractive, especially relative to global bonds and cash.

Bonds
The rand weakened over the quarter from R13.10/$ to R13.50/$ at the end of September. The benchmark SA 10-year bond yield declined from 8.77% to 8.55% over the quarter. This move was supported by SA’s high real yields, expectations of a lower inflation trajectory into year-end and the global backdrop. The SA Reserve Bank (SARB) surprised the markets by delivering a repo rate cut of 0.25% to 6.75% at its July meeting. The decision was supported by inflation reducing from 5.4% to 5.1% in June with further moderation expected. The SARB was also surprised at the very weak growth outcome of the first quarter of -0.6%. In an unexpected move again, the SARB’s Monetary Policy Committee (MPC) left the repo rate unchanged at 6.75% (prime at 10.25%) at its September meeting with three members voting for a cut, and three members voting for unchanged rates. The MPC’s tonality was hawkish and, although unanticipated by the market, does confirm and complement its basis of data-dependence. Given the possibility of further credit rating downgrades, growth disappointments, further political uncertainty and a potential impact on the currency and foreign capital flows, the SARB would be loathe to cut too aggressively to prevent compressing real rates. The combo of low growth and low inflation breeds an environment conducive to interest rate cuts. However, we believe that the current loosening cycle will remain shallow and this, together with a lack of confidence on the part of consumers and businesses, is unlikely to boost growth meaningfully. The front-end of the yield curve re-priced aggressively higher, leaving the curve flatter after many months of steepening. For the quarter to September, nominal bonds returned 3.8%, cash returned 1.8% and inflation-linked bonds added 1.2%.

For our funds, cash continued to be enhanced through investments in select corporate debt as specific opportunities presented themselves and at yield pick-ups well above money market rates. Nominal bonds were slightly lower from a corporate maturity perspective during the quarter. During the third quarter, primary market credit auctions received strong support with auctions clearing well below price guidance on the back of significant investor demand. Looking at the volume of bids submitted and range of bid levels, there is a substantial amount of capital available and looking for relatively fewer available opportunities. Issuance was dominated by the banks and financials, which made up more than half of the total. Some of the issuance was driven by regulatory capital considerations as a substantial amount of subordinated paper was placed, both Tier 2 debt and Additional Tier 1 debt. Subordinated issuances were well supported and cleared at significantly lower levels compared to where the paper was placed previously. Securitisations and corporates made up for most of the balance of the issuance, with stateowned enterprises (SOEs) lagging behind compared to previous years. Spreads on SOEs continue to trend higher and trade at elevated levels, as investor sentiment and governance issues have continued to weigh on the sector.

We believe credit to be fairly priced in general, with some corporate credit counterparties on the expensive side, but there are some specific opportunities that are attractive from both a valuation and quality measure. We believe that South African fixed-income assets remain an attractive investment to consider if compared to the domestic bonds of similarly rated countries. Locally, we see real yields of between 2% and 3% on offer against a backdrop of a declining inflation environment. That said, although local bonds are attractively valued, we believe that they could offer better value into year-end given the risk events at play. We prefer nominal bonds to inflation-linked bonds on a relative value basis

Market review
The year 2016 will be remembered for a few big geopolitical surprises, namely Brexit and the election of Donald Trump as US president. Both of these events were largely driven by populism and protectionism. One could call it the ‘revenge of the middle class’. The election of Donald Trump led to a sharp increase in US treasury yields (and global yields) as markets priced in possible fiscal stimulus from the US, deregulation and a possible increase in trade barriers. We saw a global sell-off in previously loved asset classes like property and bonds, while value stocks started to outperform substantially in the aftermath of the US election results.

On the domestic front we had to deal with ongoing political infighting, which led to frequent bouts of currency volatility. We started 2016 dealing with the aftermath of the ‘Nenegate’ episode and a weak currency. Fortunately, South Africa managed to retain its investment grade rating for the time being. The rand recovered some lost ground over the course of the year and closed at R13.68/$ from R15.49/$ the previous year. This off course affected all portfolios with offshore exposure significantly and reminded investors that the rand is not always a one-way bet, unlike the previous couple of years. One could argue that stabilising growth in China and significant infrastructure spend from the US will support commodity prices and hence currencies like the rand; the counter argument could be that rising global yields might exert a bit more pressure on emerging market currencies as a whole.

We maintain that we are close to the top of the domestic tightening cycle with the repo rate at 7%. The RSA 10-year bond yield closed the year at 8.92%, down from 9.69% at the beginning of 2016. Nominal bonds had a fantastic year following the terrible 2015 and posted an annual return of 15.5%. Inflation-linked bonds returned +6.3% for the year, while cash delivered +7.4% for the year. The FTSE/JSE All Share Index (ALSI) ended 2.1% lower for the quarter, but +2.6% higher for the year. For the year, the SA Resources Index gained a massive 34.2%. In dollar terms, the MSCI World Index was 1.9% higher over the quarter (+7.5% for the year) while the MSCI Emerging Markets Index posted a return of -4.2% (+11.2% for 2016). Global bonds, as measured by the Barclays Capital Aggregate Bond Index, declined by 7.1% (+2.1% for the year).

Asset allocation
Over the quarter the overall fund duration stayed fairly constant with little changes between the different fixed-income asset classes. We continued the process of yield enhancement although corporate credit looks expensive relative to bank credit spreads. Our clear preference for fixedrate negotiable certificates of deposit (NCDs) and nominal bonds over inflation-linked bonds paid dividends over the calendar year, although, admittedly, we started 2016 at very attractive nominal yield levels.

The overall strategy of maintaining downside protection for the domestic equity component of the Absolute Return funds worked well in 2016. The funds’ domestic equity exposure increased over the quarter due to the rolling of some protective overlays. We reduced our international equity exposure somewhat as global equities are starting to look expensive, especially the US component. The lack of other attractively valued offshore investments prevented us from implementing a more aggressive view. For funds with international exposure, the maturities of currency hedges led to an increase in offshore exposure. This strategy worked well as we saw the rand strengthening over the course of the year.
Investment strategy
As stated last quarter, South African fixed-income assets remain attractive as an investment case, despite very good 2016 performances. Real yields of between 2% and 3% are still on offer in the fixed-income space. Although breakeven inflation levels have come down from the first quarter levels, we still prefer nominal bonds over inflation-linked bonds over the medium term. Some of the possible headwinds for the local fixed -income market could be rising global inflation expectations, rising global bond yields and currency weakness from unexpected political surprises.

The price-to-earnings (PE) ratio of the local equity market looks expensive printing above 20. Given the increase in commodity prices the earnings of the resources companies are expected to make a significant recovery and should bring the PE to below 15 by year-end. However, this is still above our estimate of a fair PE of 12 to 13. The US market is expensive on a current rolled PE of 20 and a price-to-book ratio of 2.8, but the lack of other attractively valued offshore investments is preventing us from reducing global equities further. Rising global bond yields might give us an opportunity in 2017 to reassess our relative global bond/equity position.

Equities
Over the last quarter, the FTSE/JSE All Share Index (ALSI) was down 2.1%, with the SA Industrial sector under severe pressure (down 4.7%) as the rand strengthened versus the major European currencies, which weighed heavily on dual-listed stocks. SA Resources too declined (down 1.2%) while SA Financials managed to buck the trend with a gain of 2.9% as South Africa averted a sovereign credit rating downgrade.

The fund benefited from the strong performance from Sappi, which was up 26.7%, with profits almost doubling over the past year. The company was buoyed by strong pulp markets, solid packaging sales and cost cutting. Our largest holding, Naspers, delivered a poor -15.2% return during the quarter. This is despite solid performance from its Chinese associate, Tencent. With the stake in Tencent being worth more than the Naspers market cap, the Naspers valuation remains solidly underpinned.

SIM equity strategy
The ALSI delivered a return of +2.6% for the 2016 calendar year. This hides the massive outperformance of value shares vs growth shares over the year, breaking a 10-year trend of value underperforming. Value’s recent outperformance was partially driven by the surprise reflation of the Chinese economy, causing a significant rally in the SA Resource Index (+34.2%) for the year. While a pullback in the relative performance of value vs growth stocks is expected, a number of indicators point to the potential for value stocks to continue outperforming over the longer term. During the quarter we added to select resource shares, which, despite the recent rally, were not fully pricing in the cash flow benefits of very strong commodity prices. New positions were established in high-quality retailers such as Mr Price (offering value for the first time in years) and Dis-Chem (a new listing). A number of domestic cyclicals have been sold off and are looking attractive. This includes financial stocks and domestic retailers. However, the local environment remains challenged with low economic growth meaning that earnings growth is likely to be subdued in the coming year. That said, we believe a lot of this is already discounted in the price.

Equity outlook
Looking ahead, investors’ choice of investment style will be key in determining outperformance in very uncertain equity markets, with the Value style offering the most potential. So far, lead indicators globally continue to remain positive and this should support the earnings momentum for cyclical stocks. For the JSE, we expect earnings to grow by a robust 20%+.

The historical PE ratio of our equity market is above 20. Given the increase in commodity prices the earnings of the resources companies are expected to make a significant recovery. If this materialises the PE would fall to below 15 by year-end. However, this is still above our estimate of a fair market PE of 12 to 13, given our long-run real required return of 7% for South African equities. Whilst not expensive in absolute terms, we continue to find the aggregate level of emerging market and some developed market equities to be relatively cheaper than the JSE.

International
The unexpected outcome of the US presidential election and speculation on its likely implications dominated global financial markets in the final quarter of 2016. Since the election of Donald Trump on 8 November as the 45th US president, global investors have grappled with the consequences for the world economy, global monetary policies and global trade. Still with the US, the Federal Reserve raised the key federal funds rate target range by 0.25% to 0.5% - 0.75%. In China, economic activity was strong with industrial production higher over the quarter and manufacturing investment growth picking up. In Europe, the European Central Bank left key policy rates unchanged in December, stating that they are set to remain at present or lower levels for an extended period of time.

In dollar terms, the MSCI World Index was 1.9% higher over the quarter while the MSCI Emerging Markets Index posted a return of -4.2%. Global bonds, as measured by the Barclays Capital Aggregate Bond Index, lost a massive -7.1% over the quarter. The rand barely moved (up 0.4%) over the quarter to end the year at R13.68 to the US dollar. For the 12 months to December, the rand strengthened 11.7% against the US dollar from oversold levels seen post Nenegate a year prior.

Looking to the international investment universe, we have over the quarter reduced some of our US equity exposure on valuation grounds. We, however, remain of the view that developed market equities continue to offer comparatively better real returns than most other competing offshore assets. Our international property holdings at an average dividend yield of close to 5.5% are attractively priced, especially relative to offshore cash.

Bonds
We maintain that we are close to the top of the domestic tightening cycle with the repo rate at 7%. Hopefully we’ll also get some reprieve from a slowdown in especially food inflation during the course of the year. The RSA 10-year bond yield closed the year at 8.92%, down from 9.69% at the beginning of 2016. Nominal bonds had a fantastic year following the terrible 2015 and posted an annual return of 15.5%. Inflation-linked bonds returned +6.3% for the year, while cash delivered +7.4% for the year.

Over the quarter the overall fund duration stayed fairly constant with little changes between the different fixed-income asset classes. Our clear preference for fixed-rate negotiable certificates of deposit (NCDs) and nominal bonds over inflation-linked bonds paid dividends over the calendar year, although, admittedly, we started 2016 at very attractive calendar year, although, admittedly, we started 2016 at very attractive nominal yield levels. As stated last quarter, South African fixed-income assets remain attractive as an investment case, despite very good 2016 performances. Real yields of between 2% and 3% are still on offer in the fixed-income space. Although breakeven inflation levels have come down from the first quarter levels, we still prefer nominal bonds over inflationlinked bonds over the medium term.