After two quakes, NAFTA worries

Emerging Markets Institute Monthly perspective | October 16, 2017

After two quakes, NAFTA worries SUMMARY  Peso investments still positive YTD September 2017, despite two strong quakes in Mexico and major hurricanes in the US and Caribbean.  As the 4th round begins, NAFTA worries are affecting Mexican investments.  Foreseeable global risks: failure of US growth agenda, problems in Brexit, oil prices, geopolitics (Korea), high asset prices, central bank policies, global slowdown.  Local risks: NAFTA renegotiation, 2018 elections.  Quakes unlikely to affect Mexican markets short term, but could affect 2018 elections.  New investment scenarios 2018 with probabilities: positive (20% vs. 30% previous), negative (40% vs. 30%), middle (40%, same).  Retain ILS medium term overweight, possible diversification to nominal debt, stocks at benchmark and REITs under benchmark. “In three words I can sum up everything I've learned about life: it goes on.” – Robert Frost

September: natural disasters have no material effect on investments On September 7 and 19, there were major earthquakes in Mexico. There were also hurricanes in the US and the Caribbean: Texas (hurricane Harvey, 84 dead), Florida (Irma, 127 dead), Puerto Rico (María, 243 dead) and West indies (José, 4 dead). Investment were not significantly affected YTD (Figure 1). Best investments YTD in US$ were: EM equities, REITs, and Mexican equities. As the 4th round begins, NAFTA worries are affecting Mexican investments. In this Perspective, we analyze the global investment environment and the two Mexican quakes: human and material damage, immediate political economic and social effects, and possible effects in the future. We lower the probability of the positive scenario for 2018 from 30% to 20%. Figure 1. Investments: performance Jan-Oct2017 (% pesos). Source: Bloomberg, Franklin Templeton ENGLISH

Acciones M. Emergentes

18.78

FIBRAS

12.76

IPC

11.37

Bonos M

7.33

Acciones MD y ME

7.32

Udibonos

6.63

MX Guber

6.50

Acciones M. Desarrollados

5.97

Cetes

5.23

S&P

2.58

ORO

0.17

UMS

0.17

US TREASURIES

-9.57

Dólar

-9.64

WTI

-14.35

1

Monthly perspective

October 16, 2017

POLITICS Franklin Templeton Servicios de Asesoría Mexico US North Korea Following nuclear tests by North Korea (NK), the last and biggest taking place on September 3, US Secretary of State Tillerson declared that he wanted to begin talks with NK. However, he was undermined by President Trump who suggested that Tillerson “save his energy”. The US Treasury declared unilateral sanctions against 8 NK banks and 26 individuals. Anton Morozov, a Russian legislator who visited NK from October 2-6, reported that it was preparing more tests for a long range missile that could reach the West coast of the US. GERMANY Federal elections In the September 24 presidential elections, Ángela Merkel won her fourth term, as expected. The extreme right party AfD (Alternativ für Deutschland) obtained 12.6% of parliamentary votes, with 94 seats, entitling it to receive 16 mn. euros, making it the third political force in the country. UNITED KINGDOM Brexit Latest news indicates that May and UK Finance Minister Philip Hammond are preparing a “Soft Brexit” proposal that implies a gradual implementation and the retention of ties with the EU, which has been strongly criticized within his own party and the opposition. On October 3, the European parliament requested a postponement of the next stage of negotiations as progress so far has not been sufficient. Although the request was not mandatory, the next meetings have been scheduled for October 19-20. Issues to be determined are: UK costs of leaving the EU, the frontier between Northern Ireland and Ireland, and citizens’ rights. SPAIN Catalonia independence On October 1, a referendum on independence from Spain was held in Catalonia. With 43% of the census voting, a total of 2.9 mn., 90.2%, voted yes. Ambivalently, the President of Catalonia, Carles Puigdemont, declared independence on Tuesday October 10, but suspended it until negotiation with Madrid. The Spanish Economy Ministry has approved a decree enabling Catalan companies to move their domicile from Catalonia. Two prominent companies, Gas Natural Fenosa and Caixabank, have announced their departure. ECONOMY US Tax reform On September 27 President Trump announced his tax reform proposal. It includes a reduction of the corporate income tax rate from 35% to 20%, reduction of the maximum individual rate from 39.5 to 35%, increase of tax deductions for the unmarried and couples with children, and the simplification of tax payments. The proposal has been met with mixed reactions, positive from businessmen, and negative from those who think that it only benefits the rich. Some have suggested that it could lead to an immediate growth spurt, unsustainable long term. The proposal should be voted on by Congress in October, and the consensus is that it is unlikely to be approved. FED On September 6, Stanley Fischer, Fed vice president, announced his resignation effective October 13 for “personal reasons, before his contracted date (2018). There are 4 vacant positions on the Fed board. Trump has nominated Randall Quarles, who favors bank deregulation, to the Fed board, and Senate confirmation is likely. The issue of whether Fed Chair Janet Yellen will repeat after her term ends in 2019 is in doubt. After meeting on September 20, the Fed announced no change to the rate (1% - 1.25%). from October 2017 it will begin asset sales, starting with US$ 10bn. monthly, US$ 6bn.Treasury bonds and US$4 bn. of MBS (mortgage backed securities). This program will likely affect long term rates. A possible rise in the funds rate is expected at end-2017. NAFTA negotiations On October 11, the fourth round of NAFTA negotiations began. In the absence of hard Information it is impossible to predict the outcome on a spectrum between two extremes. At one, positive, extreme: a modernized “win-win” agreement, resolving aspects of the current agreement such as rules of origin, supply chains, dispute resolution and adding new sectors (energy, telecoms, ecommerce). At the other, negative, extreme: NAFTA termination, leading

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Monthly perspective

October 16, 2017

to unemployment, higher costs for consumers and companies, and long term uncertainty as each country negotiates Franklin Templeton Servicios de Asesoría Mexico new trade relations (like Brexit), with very negative consequences for Mexican investments. Reasons for optimism are the economic irrationality of termination, support for NAFTA of the productive sector in each country, and the idea that threats of termination are a negotiating tactic. The strongest reasons for pessimism are the unpredictability and unilateral power of the US President. MEXICO Two quakes Seismology Mexico is in a region of high seismic activity owing to the interaction of 5 tectonic plates (Figure 2). There are 40 seismic shocks daily but most are imperceptible. The most important quakes are shown in Figure 3. Figure 2. Mexico: tectonic plates. Source: Servicio Sismológico Nacional

Figure 3. Mexico: most severe quakes and consequences. Source: Servicio Sismológico Nacional

Year

Epicenter

Magnitude

Death toll

1787

Oaxaca

8.4-8.7

ND

1932

Colima

8.2

431

1985

Michoacán

8.1

10,000-40,000

1995

Colima

8.1

49

After the 1985 quake, which caused deaths estimated between 10,000 and 40,000 and severe material damage in Mexico City, Jalisco, Michoacán y Guerrero, a Seismic Alert System for Mexico City was developed. The system provides a 30 second warning, depending on the distance between the epicenter of the quake and Mexico City. It facilitates the evacuation of buildings and reduces victims. As most of the sensors for the system are in Oaxaca state, quakes with epicenters in other areas are not completely covered. September 2017 The first quake occurred on September 7 at 23:49 pm measuring 8.2 degrees with its epicenter to the Southeast of Chiapas. The most affected states were Chiapas and Oaxaca. The second quake occurred on September 19 at 13:14 pm measuring 7.1 degrees with its epicenter on the border between the states of Puebla and Morelos. Human and material damage After both quakes, to October 1, 378 tragic deaths had been reported, with damage to 181,448 constructions (Figure 4). 11,185 ambulances had been deployed and almost 48,000 people had received medical attention.

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Monthly perspective

October 16, 2017

Figure 4. Human and material damage (October 1). Source: Presidencia de la República y Protección Civil

Franklin Templeton Servicios de Asesoría Mexico Building damage

States

Death toll

Slight damage

Moderate damage

Total damage

Total

1,308

500

10,903

Ciudad de México

221

9,095

Morelos

74

1,355

1,489

349

3,193

Puebla

45

6,233

12,377

3,319

21,929

Estado de México

15

2,086

1,547

1,695

5,328

6

6,000

8,500

2,500

17,000

Oaxaca

1

31,647

19,416

13,665

64,728

Chiapas

16

41,564

11,305

5,498

58,367

Total

378

97,980

55,942

27,526

181,448

Guerrero

Housing Of buildings affected by the quake, 150,000 are estimated to be houses. According to the Ministry of Rural Development (Secretaría de Desarrollo Agrario), more than 250,000 lost their homes, mostly outside Mexico City, with potential for serious social problems in Morelos, Puebla, Oaxaca and Chiapas. 205 official shelters have been prepared, but only 14,689 are lodged there. Cost of reconstruction On September 27 the government announced a preliminary estimate of more than $38 bn. pesos (US$2 bn. approx. at the current US$/peso rate, and approximately 0.2% of 2016 GDP) for reconstructing affected zones. Of the total, $6.5bn. would be for housing in Chiapas and Oaxaca, $10bn. for the other states, $8bn. for historic buildings and $13bn. for damaged schools. After the 1985 quake the cost of reconstruction was US$4 bn. (approximately 2% of 1985 GDP), according to the Mexican Insurers’ Association (AMIS). It also had a relevant impact on growth, as in 1986, Mexico grew by -3.75%. Government After the quakes an emergency was declared in 400 municipalities. The government deployed 90,000 people, 34,843 belonging to the Ministries of Defense (SEDENA), Navy (SEMAR) and the Federal Police. In addition 439 volunteers arrived from 13 countries: Panamá, El Salvador, USA, Spain, Ecuador, Japan, Honduras, Israel, Colombia, Costa Rica, Switzerland, Peru and Germany. Catastrophe bond In August 2017, the government renewed a catastrophe bond issued by the World Bank as an insurance against natural disasters with a coverage of U$$360mn; US$150mn. exclusively for quakes. However, the quake insurance portion is only activated in relation a quake strength higher than 7.8 degrees and to the epicenter. Therefore funds can only be applied for the first quake to Oaxaca and Chiapas. The Finance Ministry (SHCP) announced that the US$150mn. will be used for reconstruction. FONDEN A difference from 1985 is that here is now a Natural Disaster Fund (FONDEN) with $15bn. Pesos, of which $1 bn.will be paid out for the quake. There is also an insurance with a loss excess of $5bn., which can be applied to Mexico City, Morelos and Puebla for the second quake, of which the amount to be paid out has yet to be announced. After November 15, the Mexican Congress may decide to increase the fund’s resources. In order to avoid misuse of funds, they will be sent to a transparent trust administered by the construction bank, Banobras, and will not sent directly to states’ treasuries. Other support The government announced support measures such as debit cards for the purchase of construction materials, supplies and the installation of care centers. In Mexico City, Governor Miguel Ángel Mancera announced that families from damaged buildings could receive a rent subsidy between $1,308-$3,000 pesos monthly and preferential loan rates.

4

Monthly perspective

October 16, 2017

Society Franklin Templeton Servicios de Asesoría Mexico Social networks Another important difference from the 1985 quake were social networks and the media, which have led to unexpected consequences. Citizens reacted immediately to the second quake on September 19. Damage was reported through social networks, help was requested, and groups of volunteers organized. In some cases, popular help was actually excessive and had to be rejected and sent to areas where it was needed. Corruption in construction permits After the 1985 quake and taking account of the fact that Mexico City was constructed on Lake Texcoco, building codes in the city were modified to avoid structural collapses in the future, becoming among the strictest in Latin America. A review of damaged buildings is still under way, but it is estimated that the majority of them were built or inspected after 1985.This has provoked a new scandal, as there is suspicion that damage was caused by corruption in the construction process. So far there are 136 investigations into irregularities in construction permits. Theft of donations and political scandals In the first days following the second quake, citizens organized to channel funds to damaged states. Two trucks with supplies destined for aid to affected towns were stopped and deviated when they tried to enter the state of Morelos. Food supplies were confiscated and locked up in warehouses of the state Organization for Integral Family Development (DIF - Desarrollo Integral de la Familia), an organization headed by Elena Cepeda, wife of the Morelos state governor, Graco Ramírez. Supplies were relabeled with the DIF logo as political propaganda in favor of Ramírez. This was immediately denounced on social networks by the trucks’ drivers and the video immediately went viral. A group of people immediately went to the place where supplies were being unloaded and took them by force to deliver them directly to affected towns. Politics Party donations to quake victims Just after the second quake, social networks pressured political parties to “donate” to reconstruction part of the funds assigned for 2018 elections. In August 2017 the National Electoral Institute (INE) had requested the highest budget in history of $25 bn. pesos for the 2018 elections: $6.7bn. between parties and independent candidates and the rest for INE itself (Figure 5). .Figure 5. Elections 2018: budget approved by party. Source: INE POLITICAL PARTIES TOTAL BUDGET PARTIDO ACCIÓN NACIONAL $1,281,114,450 PARTIDO REVOLUCIONARIO INSTITUCIONAL $1,689,590,077 PARTIDO DE LA REVOLUCIÓN DEMOCRÁTICA $773,583,685 PARTIDO DEL TRABAJO $376,770,017 PARTIDO VERDE ECOLOGISTA DE MÉXICO $578,204,704 MOVIMIENTO CIUDADANO $537,021,858 NUEVA ALIANZA $419,106,116 MORENA $649,217,254 ENCUENTRO SOCIAL $398,365,190 Total $6,702,973,351 Pressure from social media led parties to formalize with the INE their contribution of part of their budget to the reconstruction of schools and homes damaged by the quake. Morena, led by Andrés Manuel López Obrador (AMLO), gave up 50% of its budget, followed by the PRI (25%), PVEM (25%), MC (100%). PAN and PRD expressed support but have yet to specify amounts. This has led to a popular movement to eliminate government finance for political parties. Some parties have expressed themselves in favor. However INE officials have declared that it is impossible to modify the electoral law 90 days before the electoral process begins (i.e. after September 8). They also pointed out the risk that by eliminating public finance the electoral process could be subject to undue influence from wealthy groups or organized crime. Political and social situation in run-up to 2018 elections According to a Consulta Mitofsky poll of August 2017, Mexico’s main problems are considered to be: insecurity and corruption. Corruption has increased with economic problems and could be aggravated by the construction problems

5

Monthly perspective

October 16, 2017

revealed by the quakes. According Franklin to a telephone poll conducted by GEA-ISA on September 22-23, President Peña Templeton Servicios de Asesoría Mexico Nieto’s popularity has improved slightly since the quakes, but is still below 20%, worse than previous presidents. Independent candidates and ruptures in political parties Margarita Zavala, former First Lady 2006-12 and presidential primary candidate for the PAN, announced on October 6 that she would leave the PAN to become an independent candidate. She argued that there are groups within the party that wish to block her political aspirations, referring to party president Ricardo Anaya. According to most polls, Zavala was second only to AMLO in the 2018 presidential polls. The deadline for registering independent candidacies was October 6 but, due to the quakes, was extended to October 14. Registration requirements include: registration of a “civil association” to present campaign income and expenditure, and 866,593 signatures from a minimum of 16 states (1% of the electoral register). So far 12 candidates have registered, of which 6 meet the requirements, 3 do not, and 3 are being processed. Economic consequences PIB States affected by the quakes account for 35.3% of total GDP (Figure 6). However, the effect on GDP is expected to be slight as the interruption in economic activity will be offset by investment in reconstruction. Figure 6. GDP: percentage of states affected by quakes. Source: INEGI STATES Total Subtotal (8 states) Chiapas Ciudad de México Guerrero México Morelos Oaxaca Puebla Tlaxcala Other Source: INEGI

% GDP 100 35.3 1.6 16.8 1.4 8.9 1.2 1.6 3.2 0.6 64.7

Inflation The quakes are unlikely to affect inflation significantly, owing to several factors:  The Mexican inflation index does not include construction materials, which could be subject to inflationary pressures during the period of reconstruction,  The pass-through from producer to consumer prices has been relatively low in recent years, and  The ANTAD (National Association of Self-Service Stores) has organized an agreement among its members to prevent prices increases in products in most demand because of the quakes. FORESEEABLE RISKS Global While some risks have so far not materialized YTD in 2017 (principally a bad NAFTA renegotiation and electoral situation in Mexico) global and local risks persist for the rest of 2017 and 2018:  USA: inability to execute Trump’s pro-growth policies (taxes, deregulation, infrastructure).  North America: problems in NAFTA renegotiation, including, possibly, its complete elimination.  Europe: problems in UK, the Brexit process and other elections (Germany and Italy).  Geopolitical: Middle East, Russia, China, and Korea.  Central bank tightening leads to slowdown in global growth. Local  Elections 2018.  Reconstruction: problems in execution.  Security: drug trafficking.  Corruption: more cases at federal and state level.  Oil prices and production: effect on federal budget.  Debt increase: deterioration in credit rating.

6

Monthly perspective

October 16, 2017

SCENARIOS FOR 2018 Franklin Templeton Servicios de Asesoría Mexico We present three scenarios for 2018 where the objective is Mexican economic growth. In the positive scenario, all foreseeable risks are favorable for Mexican growth, in the negative scenario that they are unfavorable, and in the middle case they are mixed through a variety of factors (by their nature, intensity or duration). Positive (20%) In the US, a combination of tax reduction, deregulation and infrastructure Investment is implemented, increasing growth. NAFTA is renegotiated positively for all sides, in terms of timing and content. Risks relating to Europe, China, Russia, Korea and Middle East do not materialize. Synchronized global growth continues and central bank tightening is handled effectively. In Mexico, electoral, security and corruption risks are contained, and prospects for elections in 2018 are positive. Negative (40%) Growth related initiatives in the US, and NAFTA renegotiations, fail. The UK and the EU disintegrate, and risks in China, Russia, Korea and the Middle East materialize. There is a global slowdown, caused either by political factors, the dynamics of the global economy, or central bank tightening and affects Mexico. Electoral, security and corruption problems increase, and the outlook for 2018 elections is negative. Middle (40%) Growth measures are implemented partially in the US. NAFTA is renegotiated with mixed results. Risks in Europe, China, Russia, Korea and the Middle East materialize partially. Global growth continues in a less synchronized manner than in 2017, and central bank tightening is not always effective. In Mexico, there are electoral, security and corruption problems, but they are contained. Prospects for 2018 elections are unclear. Owing to the deterioration in NAFTA renegotiation and increased uncertainty of 2018 electoral prospects, we lower the probability of a positive scenario to 20% and raise the negative scenario to 40% MARKETS US$ and peso The quakes did not significantly affect the peso (Figure 7). Meanwhile, the combination of the rise in Fed rates, and increased tensions in NAFTA renegotiations, after the quakes, increased peso undervaluation form -22% to 24% (Figure 8). Source: Bloomberg Figure 8. Peso vs. US$: 1979-Oct2017. Source: Franklin Templeton

22

40%

20

18.2

18

13.7

14

0%

12

10 8

-20%

-17.2%

-24.%

6 4 2

Mexican peso

PPP theoretical value

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

-54.8%

1979

0

-40%

-40.5%

-60%

Under /over valuation

7

Sub / Sobrevaluación

20%

16

$ / USD

Figure 7.US$ index and peso Aug2017-Oct2017.

Monthly perspective

October 16, 2017

Comparative performance of investments in US$ denominated and peso denominated securities Franklin Templeton Servicios de Asesoría Mexico Despite peso depreciation, long term (2000-2017), peso denominated securities have outperformed US$ denominated securities (measured in pesos) on a risk return basis (Figure 9). Figure 9. US$ and peso investments: performance measured in pesos 2000-Oct2017. Source: Franklin Templeton

Rendimiento anualizado (%)

16 IPC

14 12

UMS REAL

10

S&P

BONOS

8

US TREASURIES

UDIBONOS

GUBER FIX FLOAT CETES FONDEO B

6

4 2 0 0

5 10 15 Desviación estándar anualizada (%)

Debt During September, the middle part of the nominal rate curve inverted more, while the long part was unchanged (Figure 10). On September 28 Banxico left its reference rate unchanged at 7%, following the Fed (page 2). Figure 10. Nominal rates: yield curves August and September. Source: PiP 7.30 7.20 7.10 7.00 6.90 6.80

6.70 6.60 6.50 6.40 1

28

91

182

360

29-Sep-17

1080

1800

3600

7200

10800

31-Aug-17

In September YoY consumer inflation fell for the first time to 6.35% (6.66% previous). We expect inflation to fall over 4Q2017 to end the year around 6%. (Figure 11) Figure 11. Consumer and Producer price indices (Sep2017). Source: INEGI

For end-2018, according to Bloomberg polls 10 year rates will rise for all developed countries and will fall in all emerging markets except Mexico, South Korea and Indonesia (Figure 12). 8

Monthly perspective

October 16, 2017 Figure 12. 10 year rates: forecast end 2018. Source: Bloomberg consensus

Franklin Templeton Servicios de Asesoría Mexico

Stocks Figure 13. MSCI AC World index: EPS growth (% YoY) 1988-2017.

Source: Bloomberg Figure 14. Stock markets: 2017 (US$). Source: Bloomberg

Global stock performance has been driven by a global increase in EPS for the first time since 2010 (Figure 13). Comparative performance in US$ was affected by peso weakness (Figure 14), but stocks were largely unaffected by the quake (Figure 15), Figure 15. Mexico: stocks: 2017. Source: Bloomberg 71,000 69,000 67,000 65,000 63,000

2016: 8.15% YTD: 12.08%

61,000 59,000 57,000

Oct-17

Sep-17

Aug-17

Jul-17

Jun-17

May-17

Apr-17

Mar-17

Feb-17

Jan-17

55,000

Mexican P/E ratios are relatively high (Figure 17), but this reflects atypical index composition. Figure 17. Mexico: estimated PER compared to other countries (Oct2017). Source: Bloomberg

9

Monthly perspective

October 16, 2017

REITs (Fibras)

Franklin Templeton Servicios de Asesoría Mexico

Owing to their novelty, high payout, and inflation protection, REITs have performed better than stocks since 2011, and in 2017 (Figure 18). FIHO raised $4bn. pesos at a price of $13.75 to finance acquisitions, mainly a hotel in Cancún. A new $6bn. pesos REIT issue, UPSITE, is expected. Subject to NAFTA negotiations, REITs could be attractive (Figure 19). Figure 18.REITs vs. Mexican stocks (IRT) mar2011-Oct2017 (base 100 MXN$). Source: Bloomberg

FIBRAS RT BMV

IRT

300

250

200

150

100

Sep-17

Mar-17

Sep-16

Mar-16

Sep-15

Mar-15

Sep-14

Sep-13

Mar-14

Sep-12

Mar-13

Mar-12

Sep-11

Mar-11

50

Figure 19. REITs: valuation and dividends (Oct2017). Source: Franklin Templeton

Mcap (M)

FUNO11 MM DANHOS13 MM TERRA13 MM FIBRAPL MM FIBRAMQ MM FIHO12 FHIPO FMTY14 MM FINN13 MM FSHOP13 MM

Calendarized

(MXN)

2013

2014

2015

2016

2017

2018

2019

103,103

4.0%

5.9%

6.4%

6.4%

6.6%

7.3%

8.1%

43,911

1.2%

5.7%

6.4%

6.9%

6.7%

7.1%

7.8%

24,838

3.8%

6.1%

6.2%

6.6%

8.0%

8.1%

8.2%

23,285

3.9%

2.5%

4.5%

5.6%

6.0%

6.5%

7.0%

19,286

8.2%

7.0%

6.4%

7.9%

6.6%

7.1%

7.8%

11,634

5.5%

6.3%

6.2%

6.8%

8.9%

9.8%

10.3%

9.5%

9.6%

10.0%

10.5%

12.1%

9,850 7,938 5,333 4,980

7.7% 5.7%

6.5%

6.0%

7.4%

8.3%

9.0%

9.5%

8.6%

9.7%

10.4%

8.6%

7.8%

8.0%

Conclusion In Mexico the tragic human and material loss of the quakes has not and will not have a major economic effect. The NAFTA and electoral outlook for 2018 have led to us to downgrade our scenario probabilities. We adjust our portfolio slightly: medium term ILS overweight, stocks at benchmark weight and REITs under benchmark. Nadia Montes de Oca Jorge Marmolejo Luis Gonzalí Ramsé Gutiérrez Editor: Timothy Heyman October 16, 2017

10

Monthly perspective

October 16, 2017

Main financial indicators: monthly and YTD performance (September 29, 2017) Franklin Templeton Servicios de Asesoría Mexico In Mexico, the IPC fell 1.69%. Short term nominal rates and long term (10y) rates rose. Real rates fell for 10y and rose for 30y. The US$ strengthened 1.93% against the peso. In the US the DJ, S&P500 and Nasdaq rose. Nominal and real rates rose for all terms. In the Banxico survey, optimism fell to 14% (26% previous), no change rose to 66% (56%), and pessimism rose to 20% (18%). Mexico Stock market and oil 29-Sep-17 IPC

31-Aug-17

Month

YTD 2017

2016

50,346.06

51,210.48

-1.69%

10.30%

6.20%

Local currency (USD/MXN)

18.16

17.81

1.93%

-11.93%

19.53%

Mexican oil mix (USD/bl)

49.02

45.62

7.45%

5.87%

69.16%

Nominal rates 29-Sep-17

31-Aug-17

Month

CETES 28

7.12%

7.04%

8 bps

YTD 2017 128 bps

2016 279 bps

CETES 360

7.00%

7.05%

-5 bps

57 bps

277 bps

M5

6.70%

6.76%

-6 bps

-51 bps

166 bps

M10

6.86%

6.84%

2 bps

-64 bps

118 bps

M30

7.22%

7.23%

-1 bps

-60 bps

87 bps

Real rates 29-Sep-17

31-Aug-17

Month

UDIBONO 10

3.11%

3.13%

-2 bps

YTD 2017 6 bps

2016 -29 bps

UDIBONO 30

3.54%

3.52%

2 bps

-25 bps

-12 bps

29-Sep-17

31-Aug-17

Month

1,279.75

1,321.43

-3.15%

10.49%

9.15%

51.67

47.23

9.40%

-3.82%

41.97%

Commodities Gold WTI (USD/bl)

YTD 2017

2016

UMS 29-Sep-17

31-Aug-17

Month

UMS 10 years

3.51%

3.42%

8 bps

YTD 2017 -76 bps

2016 40 bps

UMS 20 years

4.44%

4.40%

4 bps

-83 bps

-3 bps

UMS 30 years

4.50%

4.45%

5 bps

-76 bps

-3 bps

Stock markets (US$) 29-Sep-17

31-Aug-17

Month

MSCI Developed

8,016.09

7,837.11

2.28%

16.53%

8.15%

MSCI Emerging

2,345.75

2,354.58

-0.38%

28.14%

11.60%

10,219.52

10,599.53

-3.59%

26.41%

-8.98%

6,455.81

6,193.30

4.24%

26.86%

66.75%

MSCI Mexico MSCI Brazil

YTD 2017

2016

US Stock market 29-Sep-17

31-Aug-17

Month

22,405.09

21,948.10

2.08%

13.37%

13.42%

S&P

2,519.36

2,471.65

1.93%

12.53%

9.54%

Nasdaq

6,495.96

6,428.66

1.05%

20.67%

7.50%

DJ

YTD 2017

2016

Nominal rates 29-Sep-17

31-Aug-17

Month

Tbill 90

1.06%

1.01%

5 bps

YTD 2017 55 bps

2016 35 bps

Tnote 5

1.92%

1.70%

22 bps

-1 bps

17 bps

Tnote 10

2.33%

2.12%

21 bps

-12 bps

18 bps

Tbond 30

2.86%

2.73%

13 bps

-20 bps

5 bps

Real rates 29-Sep-17

31-Aug-17

Month

Tip 5

0.24%

0.12%

12 bps

YTD 2017 15 bps

2016 -36 bps

Tip 10

0.49%

0.36%

13 bps

-1 bps

-23 bps

Tip 30

0.94%

0.87%

7 bps

-5 bps

-29 bps

Bank of Mexico survey Indicator

2017 2017 anterior

PIB

2.10%

2.16%

Inflation

6.30%

6.24%

Cetes 28

7.04%

7.06%

Local currency

18.14

18.23

Business conditions

29-Sep-17

31-Aug-17

Optimism

14%

26%

No change

66%

56%

Pessimism

20%

18%

Source: Bloomberg, Banco de México

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Monthly perspective

October 16, 2017

IMPORTANT LEGAL INFORMATION Franklin Templeton Servicios de Asesoría Mexico The material has been prepared by Franklin Templeton Servicios de Asesoría Mexico, S. de R.L. de C.V. (“FTSAM” or the “Company”) which has the folio inscription number 30045-001-(14127)-15/04/2016 in the Public Register of Investment Advisors assigned by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) in terms of the Securities Market Law (Ley del Mercado de Valores). Registry does not imply compliance with the regulations applicable to the services that are provided, nor the precision or veracity of the information provided. The content of this document is for information purposes only. Past Performance is not a guarantee of future returns. The material has been prepared by FTSAM solely for use in this document, and is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any kind. Nothing in this document should be construed as investment advice. This document may contain information obtained from various sources, and while it may be considered reliable, the Company makes no warranty or any statement on its fidelity, accuracy, scope or coverage, as the Company has not verified, validated or audited independently such information. The information is partial and, therefore, cannot be called complete. You agree to keep the contents of this document strictly private and confidential and it shall not be disclosed, copied, reproduced or redistributed (in whole or in part) to any person without the prior written consent of the Company. This document may contain "forward looking statements" and results may vary from those expressed or implied are included in this document. Such forward-looking statements can be identified, among other words, by the use of terminology such as "expect", "anticipate", "believe", "continue", "could", "estimate", "predict", "try" "plan", "predict", "should" or other forward-looking terminology, or by the negative of these words or comparable terminology, including without limitation the plural form of these words. All forward-looking statements relate to the Company's current expectation regarding future events and are subject to a number of factors that could cause actual results to differ materially from those in respect of the forward-looking statements. One must be cautious of such statements and should not place undue reliance on any forward-looking statements. This document includes no representation or warranty (express or implied) so it should not support the accuracy, fairness or completeness of the information presented or contained in this document. Neither the Company nor any of its affiliates, employees, advisers or representatives accepts any liability for any loss or damage caused by the information presented or contained in this document. The information presented or contained in this document is current as of the date indicated and is subject to change without notice and its accuracy is not guaranteed. The information contained herein and the views, if any, expressed therein are issued on the date hereof and, therefore, are conditioned and / or subject to probable changes due to changes in applicable law, as well as the conditions and circumstances that may or may not be provided in this document, in addition to over time and other similar situations. Neither the Company, nor its affiliates, agents, employees nor advisers assume any responsibility or obligation to inform you or any other person regarding any changes to the information or opinions expressed herein resulting from matters, circumstances or events that may arise in the future or that may be brought to our attention after the date herein. This document should not be construed as legal, tax, investment or any other type of advice. This document does not constitute an offer or invitation to purchase or subscribe shares or other securities and no part of this document or any information, opinion or statement contained herein shall be the basis of, or be referred to in connection with any contract or commitment. Any decision to purchase securities in any offering of securities should be made solely on the basis of information contained in the prospectus of the securities offered. By reading this document, you agree to be subject to the above limitations. *Timothy Heyman, President of FTSAM, founded Heyman y Asociados in 1985. In 2013, Franklin Templeton established FTSAM and merged it with Heyman y Asociados. Copyright © 2017. Franklin Templeton Investments. All rights reserved. Valid only in the United States of Mexico.

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