Pichardo Asset Management Independent Portfolio Management Firm

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1 Pichardo Asset Management Independent Portfolio Management Firm Review of the Mexican Economy October 7, 8

2 Content I. United States Mexico Canada Agreement (USMCA) II. Trade War and Exchange Markets III. Financial and Stock Markets IV. Inflation, Monetary Policy and Debt Market V. A Review of the Mexican Economy VI. Is Mexico Bankrupt?... Of Course Not!

3 I. United States Mexico Canada Agreement (USMCA) Reduces Exchange Rate Uncertainty Exports represent % of Mexico GDP, out of which, 8% goes to the US. Disturbing these commercial flows could have caused a significant recession in the Mexican economy. Since August 7th, when the commercial understanding between Mexico and the US was announced, exchange rate fluctuations narrowed drastically towards a rango between 8.5 and 9.5. The inclusion of Canada in USMCA fosters a free trade bloc in North America and encourages US Representatives to ratify the agreement. In contrast to budget planning activities in 7, companies, goverment offices and investment funds can now plan ahead and prepare for the future in better terms. Limits Potential Protectionism Several commitment letters exclude Mexico and Canada from potential US national security penalties, such as steel and aluminum import tariffs. Favors Competitive Advantages Given the escalation of the trade war with China, a free trade bloc in North America is strategic in US trade policy given the competitive advantages of the three countries in the region. Canada has an abundance of commodities, EU with capital and technological knowledge and Mexico with internationally competitive salaries. 3

4 I. United States Mexico Canada Agreement (USMCA) Dispute Resolution Mechanisms The US proposed replacing dispute settlement mechanisms with domestic courts, which could be more expensive and time consuming. The commercial understanding between Mexico and the US did not include Chapters 9 nor 3. This Chapter was included when Canada joined the agreement. Sunset Clause November 3th is the deadline for Enrique Peña Nieto to sign the deal. Trump has 6 days to request US law changes to Congress The US International Trade Comission has 5 days to review the agreement The USMCA will be reviewed every six years and will be ratified every 6 years. Mexico and Canada rejected having to ratify the agreement every five years. Automotive sector The most favored nation" tax of.5% for the automotive sector remains unchanged. Required regional content increased from 6.5% to 7% for and 75% for 3. At least 4% of light cars and 45% of pick-ups must comply with an average salary of $ 6 per hour. Agriculture Canada will eliminate its Class 7 milk policy that makes it cheaper for processors to buy domestic supplies of ultra-filtered milk, an ingredient used in cheese and yogurt. The seasonality clause was not included. Agricultural products can be exported, even in harvest season. 4

5 I. United States Mexico Canada Agreement (USMCA) March 3th The US imposed% and 5% tariffs on aluminum and steel, which affected Chinese exports worth 3, billion usd. July, 5th The US announced potential $ 5 billion fees for damages on intellectual property. July, th The US announced potential tariffs on Chinese products worth billion dollars. September, 8th US announced a new % tax on 5, Chinese products effective on the following week. The tax would increase to 5% in 9, and could increase even more in case of a hostile response. September, 4th US imposes new tariffs on Chinese products. April, nd China applied import tariffs on 8 American products worth 3, billion usd. July, 6th The US and China applied mutual tariffs worth $ 36 million dollars. September, 7th Trump threatened to impose additional 67 billion tariffs, on top of tariffs worth billion dollars that were announced in July. September, 8th China announced tariff rises worth $ 6 billion dollars. September, 9th China announced a potential decrease on import tariffs to some countries in order to protect consumers. 5

6 I. United States Mexico Canada Agreement (USMCA) US Gross Domestic Product US Inflation 5% 4% 3% % % % 4.% %.% -% Inflation Core CPI Source: U.S. Bureau of Economic Analysis US Unemployment Rate and Non-Farm Payroll 4.% 9.% 8.% 7.% - 6.% -4 5.% 3.9% -6 4.% -8 3.% Source: Bloomberg Conference Board Consumer Confidence % % 4 8% 6% 4% 4.76% % 8 % 6 -% -4% 4-6% -8% Source: Bloomberg Non-Farm Payrolls Unemployment Rate Source: Bloomberg YoY Consumer Confidence 6

7 I. United States Mexico Canada Agreement (USMCA) Exports 7 % of Total Annual Change YTD % of Total Annual Change Aug-8 % of Total Annual Change Total Exports 49,4.% 9.5% 95,34.%.3% 39,536 %.% Oil 3,7 5.8% 5.9%,548 7.% 43.%,74 6.9% 47.% Crude Oil,3 4.9% 8.5% 7,73 6.% 5.3%, % 47.4% Others 3,678.9% 3.4%,87.% 6.4% 39.% 46.% Non-Oil 385,7 94.% 8.6% 74, % 9.4% 36,83 93.% 8.% Agricultural 5,88 3.9% 7.87%,78 3.8% 6.3%,.6% -7.4% Mining 5,47.3% 4.4% 4,3.5% 4.7% 5.3%.3% Manufacturing 364, % 8.44% 59, % 9.4% 35,8 89.% 8.5% Automotive Industry 6,67 3.9%.79% 9,946 3.%.8%, %.8% Others 37, % 6.74% 67,5 56.6% 7.6%, % 6.8% Imports 7 % of Total Annual Change YTD % of Total Annual Change Aug-8 % of Total Annual Change Total Imports 4,369.% 8.6% 35,37 %.% 4,7 % 9.4% Oil 4,.% 3.4% 35,37.6% 37.7% 4,95.8% 3.5% Non-Oil 378,359 9.% 5.% 69, % 9.5% 37,75 88.% 7.% Consumption Goods 4,37.% 4.8% 8,5 9.% 5.% 4,7 9.7% 3.4% Intermediate Goods 95,38 7.% 7.%,7 69.3% 9.4% 8, % 8.% Capital Goods 4,4 9.8% 3.3% 3,63 9.8% 4.% 4,89 9.9% 9.3% Trade Balance 7 YTD Aug-8 Trade Balance -,968-7.% -,9 6.6% -, % Source: Mexico's Ministry of Economics Amounts in Millions of Dollars %, Capital Goods Exports (august 8) 7%, Oil 89% Manufacturing Imports (august, 8) 76%, Intermediate Goods 3%, Agricultural %, Mining 4%, Consumption Goods 7

8 I. United States Mexico Canada Agreement (USMCA) Trade Patterns with the U.S. & External Accounts 8

9 II. Trade War and Exchange Markets MXN Peso vs. US Dollar MXN Peso vs. Strong Currencies Peso (MXN/USD) +4.68% Peso (MXN/USD) +4.68% Euro (EUR/USD) -3.9% Canadian dollar (CAD/USD) -.9% British Pound (GBP/USD) -3.99% MXN Peso vs. LATAM Currencies MXN Peso vs. Currencies in Emerging Countries Peso (MXN/USD) +4.86% Argentine Peso (ARS/USD) -5.89% Real (BRL/USD) -6.99% Colombian Peso (COP/USD) -.37% Peso (MXN/USD) +4.68% Turkish Lira (TRY/USD) % South Africa Rand (ZAR/USD) -3.55% Yuan (RMB/USD) -5.% Source: Bloomberg. (Index = December, 9th, 8) 9

10 II. Trade War and Exchange Markets Spot Exchange Rate MXN/USD (As of October, st, 8) % 3.75% 3.% Source: Bloomberg

11 III. Financial and Stock Markets MEXBOL (As of October, st, 8) 5, 5.6% 5,73 5,65 5,73 5, 4.8% 49, % 49,36 5, 48, 46, 44, 4.7% 46,9 48,695.% -6.% 45,768 44,8 8.8% 48,47 48,76-8.5% 47, 44,364-9.% 46,973 49,9.3% -.6% 45,87 44,647 49,84 48, 44,8 4, 4, 4,65 Source: Bloomberg

12 III. Financial and Stock Markets MEXBOL Returns (As of October, st, 8) US Mexico MEXBOL vs. US Stock Indexes Dividends reinvested index Local USD INDEX 7 8 Sept. Oct. 7 8 Sept. Oct. Dow Jones 8.% 9.63%.97%.73% 8.% 9.63%.97%.73% S&P 5.8%.96%.57%.36%.8%.96%.57%.36% NASDAQ 9.73% 7.36% -.7% -.% 9.73% 7.36% -.7% -.% Mexbol.%.55% -.9%.68% 5.44% 8.7%.56%.85% Argentina Brazil Chile Peru Colombia Mexico MEXBOL vs. LATAM Stock Indexes Dividends reinvested index Local USD INDEX 7 8 Sept. Oct. 7 8 Sept. Oct. Merval 77.7% 8.38% 4.3% -.6% 5.94% -49.% 4.5%.88% Bovespa 6.86%.9% 3.48% -.9% 4.7% -5.7% 5.33% -.76% Ipsa 34.4% -4.78%.5%.8% 45.98% -.97% 3.87%.3% S&P/BVL 8.3% -.%.6%.3% 3.7% -4.4%.74% -.3% COLCAP 4.79%.5% -.%.46% 5.38%.7%.59% -.56% Mexbol.%.55% -.9%.68% 5.44% 8.7%.56%.85% Source: Bloomberg

13 III. Financial and Stock Markets MEXBOL Returns (As of October, st, 8) MEXBOL vs. Europe Stock Indexes Dividends reinvested in the index Local USD INDEX INDEX 7 8 Septiembre Oct. 7 8 Sept. Oct. Italy FTSE FTSE MIB MIB 6.9% -3.6%.5% -.49% 33.5% -6.7%.68% -.88% Spain IBEX IBEX.5% -3.67% -.9%.9% 6.8% -7.3%.7% -.% France CAC CAC.54% 6.5%.74%.4% 8.8%.5%.9% -.5% Germany DAX DAX.5% -4.48% -.95%.75% 8.5% -8.8% -.79%.36% Switzerland SMI SMI 7.88%.64%.38%.43% 3.6% -.4%.74% -.36% UK FTSE.95%.73%.4% -.9%.64% -.9%.79% -.5% Russia IMOEX -.3%.66% 6.% -.3% 6.% 8.% 9.9%.% Mexico MEXBOL Mexbol.%.55% -.9%.68% 5.44% 8.7%.56%.85% China China India Indonesia Japan South Korea Mexico Source: Bloomberg MEXBOL vs. Asia Stock Indexes Dividends reinvested in the index Local USD INDEX 7 8 Septiembre Oct. 7 8 Sept. Oct. SZSE 4.5% -.8% 3.3% * 3.5% -7.4%.77% * SSE Composite 8.75% -.63% 3.67% * 5.99% -7.4% 3.% * SENSEX 9.56% 8.3% -6.%.83% 37.93% -5.5% -8.39% -.8% IDX.47% -4.57% -.68% -.53%.4% -3.6% -.5% -.79% TOPIX.3%.9% 5.43%.4% 6.63%.65% 3.8% -.38% KRX 8.48% -5.99% -.5% -.% 44.73% -9.47%.5% -.36% Mexbol.%.55% -.9%.68% 5.44% 8.7%.56%.85% *People Republic of China National Holliday 3

14 Cientos IV. Inflation, Monetary Policy and Debt Markets 9.% Banxico and FED Funding Rates 8.% 7.% % 5.% Current Spread: 55 bps 4.% 3.% Maximum Spread: 8 bps.%.5.5.%.% Source: Bloomberg and PAM estimates U.S. Federal Funds Rate (Upper Bound) Banxico Official Overnight Rate BANXICO Monetary Policy Oct Nov FED Monetary Policy Dec. 8. Sept. 6.5 Nov. 8.5 Dec. 9.5 Jan. 3.5 Mar..75 May..75 Jun Jul

15 IV. Inflation, Monetary Policy and Debt Markets 7.% Inflation (YoY % Change) 6.5% 6.% 5.5% 5.% 4.88% 4.5% 4.% 3.5% 3.64% 3.%.5%.% Source: INEGI Inflación general Inflación subyacente Banxico Target Banxico Estimates Survey 5

16 IV. Inflation, Monetary Policy and Debt Markets Core Inflation (YoY) Non-Core Inflation (YoY) 7% 6% 5% 8% 5% % 9% 3.5% 4% 3% 3.85% 3.36% 6% 3% % %.87% % -3% Goods Services Agricultural Energy & Government Regulated Source: INEGI 6

17 IV. Inflation, Monetary Policy and Debt Markets 3.5 Treasury Bonds (Y) vs Federal Funds Rate Actual Diferential 75 bps.5..5 Diferential //6 97 bps Diferential 7/9/7 79 bps..5. Source: Bloomberg Treasury Bonds ( Y) Federal Funds Rate 7

18 IV. Inflation, Monetary Policy and Debt Markets 3. Years Treasury Bills (As of October st, 8) Years M Bonds (As of October st, 8) %.6%.%.6%.%.6% Fuente: US Treasury Bond Yield Curve (As of October st, 8) (3 Years) ( Years) (3 Years) 3.% 3.5%.89% 3.8% 3.3%.76%.38% % % % 7.9% 7.7% 7.5% 7.3% 7.% 6.9% 6.7% 6.5% (3 Years) 8.% 7.74% 6.65% M Bonds Yield Curve (As of October st, 8) ( Years) (3 Years) 8.9% 8.8% 7.93% 6.76% Source: Bloomberg 8 8.4% 7.% 9 3 8

19 V. Review of the Mexican Economy 4.5 Mexico's GDP Growth (Seasonally Adjusted) (YoY) Expected GDP Growth (YoY) Average:.% Source: INEGI, Bloomberg, Banxico, SHCP 9

20 V. Review of the Mexican Economy 5% 3% Same Store Sales (% YoY) YoY% 3% Consumer Confidence (% YoY) Index % % 7.4% 9% 95 7% 5.% % 9 5% % 85 3% % -% 8 -% 75-3% -5% Walmex 5.9% ANTAD 5% -% -3% YoY 7.4% Consumer Confidence Source: ANTAD & Walmex Source: INEGI y Banxico

21 V. Review of the Mexican Economy 6% Global Economic Activity Index (IGAE) (Seasonally Adjusted) % 3.3% 8 5 % 99 % 96 Source: INEGI

22 V. Review of the Mexican Economy 3% 5% % 5% % 5% % -5% -% Agriculture YoY.8% Agriculture 4.3 Global Economic Activity Index (IGAE) (Seasonally Adjusted) % % 4% 3% % % % -% -% -3% Industrial Activity YoY.% Industrial Activity % Source: INEGI 7% 6% 5% Source: INEGI Services YoY 4.4% Services % 4.4% 3% 5 % % % 95 Source: INEGI

23 V. Review of the Mexican Economy Real Wage Growth Unemployment and Insured Workers 8.% 7.% 3.%.% % 5.7%.% % 4.8%.% % -.% 4. 3.% -.%..% -3.%. Real Wage Growth.89% Wage Growth Annual Inflation Source: Banxico, INEGI Source: IMSS, INEGI Total Insured Workers Unemployment Rate 3

24 VI. Is Mexico Bankrupt?... Of Course Not! Billion Dollars Balance of Payments Source: Banxico 4

25 VI. Is Mexico Bankrupt?... Of Course Not! Current Account Deficit USD Billions 5 Trade Balance USD Billions - Tourism Source: Banxico Source: Banxico USD Billions External Debt Interests USD Billions Remittances Source: Banxico Source: Banxico 5

26 VI. Is Mexico Bankrupt?... Of Course Not! USD Billions Financial Account Surplus Foreign Direct Investment 7.84 USD Billions Portfolio 3.68 Source: Banxico USD Billions -5 - Mexican Investments Abroad -.49 Source: Banxico USD Billions Source: Banxico Other Investments Source: Banxico Source: Banxico 6

27 VI. Is Mexico Bankrupt?... Of Course Not! 3 Years UMS vs Treasury Bond Spread (As of October st, 8) Public Sector Financial Requirements (As % of GDP) Source: Bloomberg MXN BN Primary Budget Balance Source: Ministry of Finance Source: Ministry of Finance Date Standard & Poor's Moody's Fitch Rating Outlook Rating Outlook Rating Outlook -Apr-8 A3 STABLE 3-Aug-7 BBB+ STABLE 8-Jul-7 BBB+ STABLE 9-Dec-6 BBB+ NEGATIVE 3-Aug-6 BBB+ NEGATIVE 3-Mar-6 A3 NEGATIVE 5-Feb-4 A3 STABLE Source: Bloomberg, El Financiero Mexico's Credit Ratings 7

28 Thank you! 8

29 PAM s Contact Information Pichardo Asset Management, SA de CV An Independent Investment Advisory Firm Andres Bello 45, nd Floor, Polanco, CDMX 55, Mexico Phone: + 5 (55) epichardo@paminversion.com Equity Portfolio Manager arodriguez@paminversion.com Macro Strategist & Debt Portfolio Manager destevez@paminversion.com Assistant Portfolio Manager Bank Analyst & Business Development jelizalde@paminversion.com Assistant Portfolio Manager Industrials & Airports Analyst lcalzada@paminversio.com Compliance igarcia@paminversion.com Investor Relations Director 9

30 Disclaimer The information contained herein reflects the opinion of Pichardo Asset Management and as such should not be taken to be fundamental research or a decision-making model. Neither should the information be interpreted as a solicitation, offer, or recommendation to buy or sell financial securities. It is also subject to changes without prior notification and estimates cannot be guaranteed. The returns mentioned herein represent past gains. Past returns to do not guarantee future gains. The investment yield and principal value of an investment will fluctuate such that when stock is redeemed, the value may be higher or lower than the original cost. The current return of the funds may be higher or lower than the yield mentioned herein. 3