mexico 101 (2011 report)

Latin America Equity Research 29 April 2011

Mexico 101

The 2011 Country Handbook

Mexico Equity Strategy

Ben LaidlerAC

(1-212) 622-5252 [email protected]

J.P. Morgan Securities LLC

Pablo Monsivais (52-55) 55409374 [email protected]

J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero

See page 79 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Mexico Economics Gabriel Casillas

(52-55) 5540-9558 [email protected]

Banco J.P. Morgan S.A. Institucion de Banca Multiple, J.P. Morgan Grupo Financiero

Iker Cabiedes (52-55) 5540-9339 [email protected]

Banco J.P. Morgan S.A. Institucion de Banca Multiple, J.P. Morgan Grupo Financiero

Other LatAm Country Handbooks: Brazil 101, April 18, 2011, Emy Shayo Colombia 101, February 14, 2011, Brian Chase

Here is the second edition of our Mexico 101 Country Handbook. We hope that it serves as a useful primer and reference guide for all those looking to better understand and invest in this country.

Cover Photo: Columns in the form of Toltec warriors, at Tula, Hidalgo.

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Ben Laidler - (1-212) 622-5252 [email protected] Gabriel Casillas - (52-55) 5540-9558 [email protected]

Table of Contents Mexico 101 ................................................................................4 Key Macro Forecasts ...................................................................................................4 Key Fixed Income Trades............................................................................................4 Equity Strategy View...................................................................................................4 Things to Know.........................................................................5 Overview ...................................................................................6 Area..............................................................................................................................6 Population ....................................................................................................................6 Politics .........................................................................................................................7 Health.........................................................................................................................10 Education ...................................................................................................................11 Migration & Remittances...........................................................................................12 Labor..........................................................................................................................13 Wealth Distribution....................................................................................................15 Competitiveness.........................................................................................................16 Security ......................................................................................................................17 Economy .................................................................................19 Financial System........................................................................................................20 Financial Stability Council ........................................................................................22 Pension Funds ............................................................................................................22 Mutual Funds .............................................................................................................24 Capital Markets..........................................................................................................24 Fiscal Policy...............................................................................................................26 Sovereign Credit Ratings ...........................................................................................28 Currency & Monetary Policy.....................................................................................29 The Central Bank .......................................................................................................30 Source: J.P. Morgan with data from Banco de México.Prices & Wages...................32 Fixed-Income Market.................................................................................................34 External Accounts......................................................................................................35 Domestic Demand ..................................................................36 Consumption..............................................................................................................36 Investment..................................................................................................................38 Exports.......................................................................................................................39 Imports.......................................................................................................................41 Sectors ....................................................................................41 Telecom .....................................................................................................................41 Housing......................................................................................................................43 Energy........................................................................................................................45 Electricity...................................................................................................................47 Tourism......................................................................................................................48 Beverages...................................................................................................................50 Retail..........................................................................................................................51 Manufacturing............................................................................................................53 Auto and Autoparts ....................................................................................................53

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Infrastructure ..........................................................................54 Roads .........................................................................................................................55 Airports ......................................................................................................................56 Railroads ....................................................................................................................57 Ports ...........................................................................................................................58 Annex 1 ...................................................................................59 Mexico Pension Funds’ Investment Regime Summary .............................................59 Annex 2 ...................................................................................60 Mexico Dashboard Data.........................................................61 Note: All pricing is as of the close on April 26, 2011, unless otherwise indicated.

Cover photo: morgueFile.

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Mexico 101 We hope that this 80-page handbook on Mexico serves as a useful primer and reference guide for all those looking to better understand and invest in this country. Ben Laidler Gabriel Casillas

Key Macro Forecasts GDP forecast to grow 4.5% in 2011, driven by manufacturing sector and domestic consumer recovery. This is a deceleration from the 5.5% posted last year.

Central Bank to raise rates 50 basis points this year, to 5.0%, as output gap remains large and medium-term inflation expectations well anchored. Expect 3.7% CPI in 2011.

We forecast continued MXN/USD appreciation into midyear (11.60 target), before weakening into year-end to 11.80, along with our global call for a stronger USD.

Table 1: Macro Summary 2010 2011E 2012E

GDP Growth (%oya) 5.5 4.5 3.5 Consumer Inflation (%oya) 4.2 3.5 3.3 Current Account Balance (%GDP) -5.7 -14.6 -20.4 Fiscal Balance (% GDP) -1.1 -2.4 -2.0 Source: J.P. Morgan Economics.

Key Fixed Income Trades (Gabriel Casillas, Emerging Market Outlook and Strategy, April 11, 2011) In external debt, remain market weight: Mexico credit has outperformed other IG peers since February and should not be expected to significantly further outpace the pack. In FX, stay short USD/MXN. In bonds, we position for both a flatter MBonos curve and a range-trading environment: Poor technicals are an overhang, but we see value in 5-year and 20-year bonds. In swaps, hold 2s5s flatteners; target 80bp, stop 145bp: Alternatively, receiving the belly in the 2s5s10s fly offers a cheaper carry and roll than outright flatteners.

Equity Strategy View After Mexico’s outperforming in 2010 both LatAm and EM, we are more cautious from here given:

Lower macro momentum and visibility. Recent cuts in 2011 growth forecasts for the US to 2.5%, on weaker consumption and capital equipment spending. The recent bringing forward of our expectation for the first Mexico rate hike to Q411 (from Q212). The belief that we have seen the best of peso currency outperformance.

Expensive valuations. Mexico’s valuations are high by almost any standard. Mexico’s premium to Brazil is 19% on sector-neutral P/E vs. 34% unadjusted. The 12m fwd P/E premium vs EM is near 30%. The market is also trading over 1 standard deviation above its own 15-year historical valuation.

Earnings vulnerable and market well owned. Mexican index earnings growth is near 40%. Even stripping out the earnings rebounds at Cemex and Grupo Mexico, it is near 30%. We believe this is too high and vulnerable to downgrades, making valuations even more expensive. Recent Mexican earnings have been weak, and the base of 2010 earnings has been falling sharply (-10% YTD). Additionally, until very recently the market was one of the largest and most consistent consensus OWs.

We would focus on domestic Mexican consumer names that continue to offer upside to the ongoing recovery of the Mexican consumer, as the credit cycle and pent-up consumer demand could both be areas of upside surprise. Our top picks are America Movil (telecom), First Cash Financial (consumer finance), Kansas City Southern (transport) and Walmex (retail).

Our 28-company Mexico sample is trading on 14.6x 2012 P/E, and 7.5x EV/EBITDA, with forecast earnings growth of 19% in 2011 and 15% in 2012.

Table 2: Mexico Constituents of LatAm Model Portfolio Local JPM Portfolio MSCI Deviation Price Rating Weight Weight Currency (%) (%) (%)

Mexico 33,493.3 16.1 19.1 -3.0 America Movil 56.7 OW 7.1 6.1 1.0 First Cash Financial 37.5 OW 3.0 0.0 3.0 Kansas City Southern 51.4 OW 3.0 0.0 3.0 Walmex 34.8 OW 3.0 2.0 1.0 Source: MSCI; J.P. Morgan estimates.

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Things to Know Mexico’s total area is nearly 2 million square kilometers (772 thousand miles), making it the 14th-largest country in the world.

Mexico has around 112 million people, making it the 11th most populous country in the world.

Mexico is the second-largest economy in Latin America and 14th in the world, with a nominal GDP of a trillion US dollars.

50% of the population is under 25, with an old-age dependency ratio around 1/3 that of developed economies.

60% of population and GDP in and around Mexico City.

In the 70 years from 1929 to 2000, the country was governed by the centrist PRI party. The PRI currently leads polls for the 2012 election.

Services account for 63% of GDP, while industrial production represents around 30%.

Mexico is an open economy, with an openness coefficient of 60% and free-trade agreements with more than 53 countries.

80% of exports go to the US. Major exports are electrical goods (39%), cars/auto parts (18%), and oil (12%).

Mexico ranked 132nd out of 139 in the 2010-11 World Economic Forum ‘Business Cost of Crime and Insecurity’ index.

Crude oil accounts for about 5-6% of GDP, 10-15% of exports and 30-40% of fiscal revenues. The government purchases oil put options to hedge its fiscal exposure.

Pemex is the world’s third-largest oil company, by crude production. Ex-Cantarell, Mexico has seen a 9.2% five-year production growth CAGR, one of the highest in the world, and vs only 3.8% in Brazil.

Remittances are the second-largest source of FX, after exports. 51% goes to food and rent.

Mexico has a Gini coefficient of 0.48. This is the 32nd-highest in the world and one of the better numbers of income distribution in the region.

The informal sector is large, estimated at 28% of the economically active population.

Credit penetration is very low, at around 16% of GDP. Only 37% of Mexicans ‘trust’ the banking system, a legacy of the 1994-5 ‘tequila’ crisis.

The financial system is dominated by foreign-controlled banks (74% of system assets). BBVA (Bancomer) and Citibank (Banamex) are Mexico’s two largest banks.

Mexico has a mandatory-contribution private pension fund system, with individual capitalization accounts, established in 1997, and now with assets of US$114bn. Its equity allocation is very low.

The Central Bank became independent in 1994 and officially set a 3% (+/- 1%) inflation target in 2002.

Mexico is the 10th most popular international tourist destination, by arrivals.

Mexico’s housing deficit is estimated at 8.9 million homes. Additionally, household formation drives demand for an additional 633,000 homes a year.

63% of MSCI Mexico is staples and telecoms. 42% is two stocks: America Movil and Walmex.

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Overview Area Mexico’s total area is nearly 2 million square kilometers (772 thousand miles), making it the 14th-largest country in the world. Mexico is the fifth-largest country in the Americas, after Canada, the US, Brazil, and Argentina. Mexico’s area is ~1.2 times that of the state of Alaska, nearly 3 times that of the state of Texas.

Table 3: Top 5 countries in the Americas by total area km2 mn mi2 mn

Canada 9.98 3.85 US 9.63 3.72 Brazil 8.51 3.28 Argentina 2.77 1.06 Mexico 1.97 0.76 Source: INEGI (National Institute of Statistics, Geography, and Information Technology) and CIA world factbook.

Population Mexico has 112 million people approximately, making it the country with the 11th-largest population in the world (Brazil is 5th with 190 million). The yearly population growth rate is currently at 1.1%, 120th place in the world (Brazil is 110th at 1.2%), having slowed from more than 3% per year in the early 1970s to 1.2% in 2004-08, and it is marginally below the Latin American average of 1.3%.

Figure 1: Population and Birth Rate

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Pop in mn Mex Pop Growth Rate Source: INEGI.

Over 50% of Mexico’s population is under 25, with the largest age group between 10 and 14 years old (10.9% of population). According to the US Census Bureau’s projections, by 2025 the largest population segment will be 25 to 29 years old and account for 7.8%

of the total population. Around 30% of the population is 14 years old or under, and the average age of the population is currently 26. Despite further shrinkage of this age group, the young dependency ratio will still be one of the highest in the world. In contrast, the old-age dependency ratio, despite rising, will be only around one-third of the projected average in developed markets.

Figure 2: Population Pyramid. (LHS: Male. RHS: Female) % of total population

0.30.40.60.9

1.21.62.0

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3.74.24.44.74.95.25.3

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Source: INEGI, 2010.

Life expectancy is 76 years, ranking Mexico 48th out of 194 countries, according to the UN. Japan is first, with 82 years, among the major countries, while Chile is the highest of the major LatAm countries at 78 years.

Figure 3: Life Expectancy Years

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Source: CONAPO (National Population Council), 2010.

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Population is concentrated in central Mexico, in and around Mexico City. Northern Mexico is the most sparsely populated area, where one-quarter of the population lives and which generates around 30% of GDP. Mid-Mexico, including the capital, Mexico City, has about 60% of the population and is responsible for 60% of GDP. Finally, the southeast, with just over 15% of the population, generates 10% of the country’s GDP. Around 10% of the total population is of indigenous origin.

Figure 4: Population Density by Region Population per km

Source: INEGI.

Mexico’s urbanized area has increased significantly since 1940, with the urbanization rate rising from 35% to over 77% in 2010. Urbanization is already high by developing country standards. Increased urbanization has been spurred by migration to the northern border states, attracted by the rapid growth of the ‘maquila’ (offshore assembly for re-export) industry, and to tourist centers on the Caribbean and Atlantic coasts.

Figure 5: Urban Population as % of Total

34% 35%43%

51%59%

71% 74% 76% 77%

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1930 1940 1950 1960 1970 1990 2000 2005 2010 Source: INEGI.

Politics Felipe Calderón, of the rightist party PAN, is the current president of Mexico, serving a six-year term that began on December 1st, 2006, and will end on November 30th, 2012. Presidential re-election is explicitly forbidden in Mexico. It is worth noting that presidents have served six-year terms since 1940. Before that, the president’s term in office lasted 4 years (from 1917 to 1940). In the 70 years from 1929 to 2000 the country was governed by the centrist PRI party.

Mexico has 7 recognized political parties, though three are the most important: the current ruling party, the rightist PAN; the centrist PRI; and the leftist PRD. The other political parties are the PT (Labor Party), PVEM (Green Party), Convergencia (leftist), and Nueva Alianza (centrist).

There are 31 state governors and 1 government head of the Federal District (Mexico City). Currently 19 governors (59%) are from the PRI, 6 are from the PAN (19%), 4 are from the PRD (13%), and 3 are from the PAN-PRD alliance (9%). As the map below shows, the PRI has an important presence in the north and southeastern parts of Mexico while the PAN is focused on the west region. The leftist PRD is more popular in poorer states, such as Guerrero and Chiapas.

The PAN and PRD made specific alliances for the governor elections in Sinaloa, Oaxaca, and Puebla, and were successful in the three of them. The alliances have caused significant debate given the diverse ideological stances of these parties traditionally.

Figure 6: Governors by political party

Source: CONAGO (National State Governors Commission), 2010.

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The Calderón Administration has faced challenges since the beginning of his term, when PRD presidential candidate Andres Manuel López Obrador (AMLO) disputed the 2006 election result, which showed he lost by 0.58%. Calderón’s administration has attempted to pursue a reformist agenda on fiscal, pension, political, education, and energy issues. However, as the figures below shows, the public’s appetite for reform has diminished. Additionally, the PAN lost control of Congress in the midterm elections, and the presidential election is little over a year away. This has all combined to make significant reform difficult.

Figure 7: Reforms have to be made in order to grow. Do you agree?

63%47% 43% 38% 48% 58%

25%41% 43% 49% 31%

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March-07 August-09 Nov-09 March-10 May-10 August-10Agree Don't agree Don't know

Source: ISA.

The next general elections will take place in 2012, and the focus for this year is the State of Mexico election scheduled for July 2011; this election will provide a barometer of political sentiment, given that this state has the largest number of voters in the country.

Table 4: Election schedule, 2011 Governor Congress Date

Coahuila X X 3-Jul Estado de México X - - 3-Jul Nayarit X X 3-Jul Michoacán X X 13-Nov Source: J.P. Morgan.

Calderón enjoys an approval rate of around 52%. As shown in the figure below, this is behind the high ratings of Juan Manuel Santos in Colombia (the highest in the region) and Rafael Correa in Ecuador, though ahead of Dilma Rousseff in Brazil, Alan Garcia in Peru, Sebastián Piñera in Chile, and Cristina Fernandez in Argentina .

Figure 8: LatAm Presidents’ Approval Ratings % Approval Rating

Source: Consulta Mitofsky, March 2011.

Presidential elections are set for July 3rd, 2012. According to recent polls from ISA, of the most popular current candidates, the PRI leads with 43%, the PAN has 17% and the PRD 15%.

Figure 9: Which candidate will you vote for? As of March 2011

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Peña Nieto (PRI) J Vázquez Mota (PAN)

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Source: ISA, J.P. Morgan.

Mexico’s government is divided into three branches: (1) the executive branch, formed by the president, state governors and municipal heads; (2) the legislative branch, consisting of local and federal congresspersons and senators; and (3) the judicial power, consisting of the judiciary and the Supreme Court.

The legislature consists of a bicameral Congress formed by senators and representatives. The senators are elected for a six-year term and there are 128 seats. Each

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state has one senator, and the Federal District (Mexico City) has 2. These 64 senators are elected under the principle of relative majority. Moreover, there is one senator for each state including the Federal District assigned under the principle of first minority, adding 32 senators. Finally, 32 senators are divided among the parties based on the proportion of the national vote, for a total of 128 senators.

Figure 10: Upper Chamber composition

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Source: Cámara de Senadores’ website (The Mexican Senate).

The lower chamber has 500 representatives. Two hundred are elected by proportional representation from among large ‘plurinominal districts’, and the remaining 300 from single-member districts on a first-past-the-post basis. Lower chamber elections take place every three years.

It is worth noting that the PRI is the largest political force in the Chamber of Representatives, with 37% of the 500 seats (21% previously) versus the PAN with 28% (41% prior) and the PRD at 12% of the total number of seats (from 25% before).

Figure 11: Lower Chamber composition

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Source: Cámara de Diputados’ website (Lower House).

We highlight that back on November 30th, 2009, President Calderón proposed a political reform aiming to change the structure of the Mexican political system. The main proposals were:

# Consecutive re-election of congresspersons and mayors

# Second-round presidential elections

# Allow independent candidacies

# Reduce the number of legislators (representatives to 400 from current 500, and senators to 96 from current 128)

# Increase the minimum share of votes for a political party to be registered in an election (to 4% from 2%)

The Upper Chamber is currently discussing this reform. Mexico hasn’t had a significant political reform since the 1970s.

The legislature holds two ordinary sessions per year. The first is from September 1st until December 15th; the second is from February 1st to April 30th. A Permanent Commission – formed by 18 senators and 19 deputies – holds legislative responsibilities between the two ordinary sessions.

The judicial branch is composed of the Supreme Court and the Electoral Tribunal, as well as several collegiate and unitary circuit tribunals, district tribunals, the Citizenship Council of the Federal Judiciary and the Federal Judiciary Council.

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The Supreme Court is the head of judicial power. It is formed of 11 ministers, each elected by the Senate from a three-candidate pool suggested by the president. They are elected for 15-year terms. The Supreme Court’s duties are to defend the Constitution, maintain the equilibrium between the executive and the legislature or any other entities at the state level, and to solve any major relevant judicial affairs. Its decisions are final.

The Electoral Tribunal of the Judiciary is the institution in charge of all electoral affairs. This Tribunal has one supreme group (7 magistrados) and 5 regional groups (3 magistrados per group); the magistrados that compose the supreme group are elected by the Senate, taking into account the Supreme Court’s suggestions. The supreme group magistrados are elected for 10-year terms while the regional magistrados are elected for 8-year terms.

The collegiate and unitary circuit judicial tribunals are divided geographically across the country. It is worth noting that there are 31 tribunals. The unitary circuit tribunals have 1 magistrado each. They resolve juicios de amparo promoted against other unitary circuit tribunals and resolve the appeals process, among other responsibilities.

The collegiate circuit tribunals have 3 magistrados and are entitled to resolve the juicios de amparo that end a legal suit and to extradite a person by request of the president or a foreign government, to give a few examples. These tribunals are specialized in different legal affairs, such as corporative, administrative, and labor, among others.

District tribunals are composed of one judge each. This is the first legal phase and might be specialized by different affairs, while the Citizenship Council of the Federal Judiciary is formed by 7 regular citizens to resolve any issue that a district tribunal judge may impose.

The Federal Judiciary Council is the institution in charge of the administration, control, and development of the judicial institutions, with the exception of the Supreme Court and the Electoral Tribunal. This institution is obliged to protect the independence and good functioning of all the judicial institutions.

Overall respect for political institutions seems reasonably low. Of the major institutions in the country, the most trusted are Universities and the Army, whilst political parties, Deputies, and Police are the least trusted (according to a Consulta Mitofsky poll).

Figure 12: Confidence level in Institutions (1=Lowest. 10=Highest)

0 2 4 6 8 10

Universit ies

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Media

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Source: Consulta Mitfosky, December 2010.

Health Public spending per capita on health has more than doubled in real terms since the 1995 ‘tequila’ crisis but remains low by international standards. At the same time, Mexico’s health indicators lag those of most OECD countries. Although population health indicators have improved over the past two decades, life expectancy at birth remains lower, child mortality higher, and outcomes are highly uneven across socioeconomic groups.

The Mexican health system is fragmented into several vertically integrated units that integrate financing, insurance, and provision. The state-owned social security institutes cover salaried workers in the formal sector, while the ‘popular health insurance’ scheme (Seguro Popular) covers part of the population working in the informal sector as well as the population in general. According to the OECD, one-third of the population, mostly in lower-income groups, has no health insurance.

Table 5: Mexican healthcare system Social security institutes Uninsured / Seguro Popular

IMSS ISSSTE Others MoH IMSS-Oportunidades % of pop 42% 9% 2% 35% 12% Source: Presidencia de la Republica.

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The Seguro Popular covers slightly less than 50% of the population, and this has grown quickly. In 2006 the Seguro Popular covered 19.1 million people. By 2010 this had more than doubled to 48.9 million.

Table 6: Healthcare Outlook 2001 2002 2003 2004 2005 2006 2007 2008

Total expenditure on health (%GDP) 5.5 5.6 5.8 6.0 5.9 5.7 5.9 5.8 Per capita total expenditure on health (PPP int. $) 373 396 397 440 478 514 564 602 Per capita government expenditure on health (PPP int. $) 247 256 277 311 329 344 372 415 General government expenditure on health (% of total government expenditure) 16.6 15.7 15.5 17.4 16.5 15.9 15.5 15.0 Private expenditure on health (% of total expenditure on health) 55.2 56.1 55.8 54.8 55.0 54.8 54.6 53.3 Source: WHO (World Health Organization).

Education The Mexican education system is structured into basic education, upper secondary education, and higher education. Children attend preschool between 3 and 5 years old, primary school between 6 and 11, and lower secondary education between 12 and 14. School attendance is mandatory until the completion of lower secondary. Upper secondary education lasts, in general, three years and includes a general or technical baccalaureate or vocational training. After upper secondary, students can move on to undergraduate (3-6 years) and postgraduate (1-4 years) university studies. Around 25 million students are enrolled in basic education, 4 million in upper secondary and 3 million in higher education.

The average annual expense per student (2007) was Ps14.2k (approx. US$1,200) for preschool, Ps12.9k for primary school, Ps19.9k for lower secondary, Ps24.5k for upper secondary, Ps17.1k for technical school and Ps54.8k for university. Around 90% of students in primary and lower secondary education go to public schools.

Mexico spent 5.7% of GDP on education expenditure in 2007, slightly above the OECD average of 5.6%. This compared to Brazil at 5.2% and Chile at 6.4%. Mexico spent around US$2,600 (at purchasing power parity) in 2007 per student versus the OECD average of US$9,195, Brazil at US$2,080 and Chile at US$3,088. The US spent US$14,269, the highest amount.

Figure 13: Education Expenditure per Student (1) In Equivalent US$ converted using PPPs

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Source: OECD. (1) Public Institutions Only. Not Private.

More than two-thirds of the population has not completed upper secondary education. In Mexico, Portugal, Turkey, and Brazil, more than two-thirds of the population aged 25 to 64 has not completed upper secondary education. On average across OECD countries, the proportion of 25- to 34-year-olds having attained at least upper secondary education is 22 percentage points higher than that of 55- to 64-year-olds. This has been particularly dramatic in Belgium, Greece, Ireland, Italy, Korea, Portugal, Spain, and Chile.

Figure 14: Population that has attained at least upper secondary education, 2008

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25-34 year-olds 55-64 year-olds Source: OECD.

Around 20% of Mexicans have a tertiary education versus an OECD average of 30%, for 25- to 64-year-olds. Growth in tertiary attainment levels between the youngest and oldest levels has been robust (5pp or more) in all countries except Austria, the Czech Republic, the US, Brazil, and Germany.

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Figure 15: Percentage of population that has attained tertiary education, 2008

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Source: OECD.

Migration & Remittances Remittances are the second-largest source of FX for Mexico, after exports. These grew dramatically, from under US$2bn/qtr in 2000, on average, to near US$5.3bn/qtr in 2010, but have been under pressure recently from increased US unemployment. In 2010 Mexico remittances totaled US$21.2 billion, equivalent to around 2% of GDP. By contrast, remittances to El Salvador, Honduras, Guyana, Haiti, and Jamaica made up over 15% of GDP for those countries.

Remittances are especially important for certain regions of Mexico with high rates of emigration and for many lower-income households where they may constitute a sizable share of total income. Moreover, because there is likely to be a high propensity to consume out of income from remittances, a decline in such income is likely to have a relevant impact on domestic demand and economic activity.

Studies have shown some evidence that remittances to Mexico respond positively to deteriorating economic conditions back home in Mexico, providing some buffer to the shock coming from the US. Also, there is some sign that remittances respond positively to a depreciation of the peso and so could help to cushion or mitigate adverse external shocks.

Figure 16: Remittance Inflows to Mexico US$ billions/quarter

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9

1Q95

3Q95

1Q96

3Q96

1Q97

3Q97

1Q98

3Q98

1Q99

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

Inflows q/q % change

Source: Banxico.

On average, US$325 is sent in each remittance. This has remained broadly stable over time, though impacted by issues such as the MXN/USD exchange rate, the US housing sector, and employment conditions on both sides of the border.

Figure 17: Workers’ Remittances USD per transaction (right axis), and number of transactions (left axis)

250

270

290

310

330

350

370

390

410

430

450

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

Jan 0

6

Apr 0

6

Jul 0

6

Oct 0

6

Jan 0

7

A pr 0

7

Jul 0

7

Oct 0

7

Jan 0

8

Apr 0

8

Jul 0

8

Oct 0

8

Jan 0

9

Apr 0

9

Jul 0

9

Oct 0

9

Jan 1

0

Apr 1

0

Jul 1

0

Oct 1

0

Number of transactions Average remittances per transactions Source: Banxico.

Remittances are especially important for the poorest. According to polling company Consulta Mitofsky, 51.2% of remittances go to food and rent, 10.9% to paying debts and 5.3% to other items related to consumption. Just 32.6% is allocated in investing; and from that, 20% to buying land or agricultural tools, 5.3% to buying houses, 4.6% to starting businesses, and 2.7% to financing education.

The US is the major source of remittances. Mexicans are the largest minority in most US states. The US is host to a 12m-strong population of Mexican origin (around an estimated one-half of which work in the US illegally).

13



Figure 18: US states where Mexicans are among top 5 minorities Source: CONAPO.

In 2009 an estimated 11 US states each sent over US$1 billion in remittances to Latin America, including California, Texas, Florida, Illinois, and New York.

Figure 19: Remittances to Latin America as of 2010 In USD mn

Source: IADB.

According to Inter-American Development Bank, Latin America and the Caribbean received in 2010 $58.9 billion in remittances, flat versus the previous year but marking an end of the downward trend seen in 2008-09 due to the economic crisis. Remittances from the US – where unemployment among Latin Americans is higher than among the general population – are expected to keep

recovering in 2011 but, according to the IADB, they will not reach pre-crisis levels.

Labor Employment is a major challenge. The total economically active population (EAP) in Mexico is around 44.5 million. This compares, in contrast, to 100 million in Brazil. However, the growth rate of those entering the formal labor market is sluggish. Recent growth rates have gone from a pre-crisis +5% yoy in 4Q06 to a crisis low -2% in 2Q09. Since then a mild recovery has been seen, peaking at +2% in Q210. The stagnation of the formal labor market has impacted the tax base as well as making social security access more difficult.

Figure 20: Employment in the formal sector

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

25

26

27

28

29

30

31

32

33

2Q004Q002Q014Q012Q024Q022Q034Q032Q044Q042Q054Q052Q064Q062Q074Q072Q084Q082Q094Q092Q10

EAP employed in the formal sectorEmployment in the formal sector growth rate yoy

Source: INEGI.

According to the INEGI, 28% of the employed EAP work in the informal sector; this share has been growing in the last 2 years. For example, in 4Q06 this share was at the lowest level recently, 26%, while in 3Q10 the share reached 27.9%.

14



Figure 21: Informal Sector % Share of Total Employment

25%26%26%27%27%28%28%29%29%30%

2Q004Q002Q014Q012Q024Q022Q034Q032Q044Q042Q054Q052Q064Q062Q074Q072Q084Q082Q094Q092Q10

Source: INEGI.

Figure 22: Composition of labor by type of job (2010)

0%

10%

20%

30%

40%

50%

60%

Com

panie

s and

busin

ess

Info

rmal

secto

r

Publi

c ins

titut

ions

Dom

estic

rem

unera

ted w

ork

Agric

ultur

e

Priva

te In

stitu

tions

Othe

r

Source: INEGI.

Another relevant indicator to assess the situation of the labor market in Mexico is the number of workers registered at the IMSS (Instituto Mexicano del Seguro Social – Mexican Social Security Institute). This is also known as the ‘formal employment indicator’ since hiring companies – by law – have to register their workers at the IMSS.

Figure 23: IMSS formal employment In thousands

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

IMSS employment - permanent, nsa IMSS employment - temporary, nsa

Source: IMSS.

As of December 2010 formal employment in Mexico accounted for 14 million (12 million permanent, 2 million temporary). Nevertheless, though we believe this is a good labor market indicator, there is a relevant drawback. Because of the not-so-flexible structure of the labor market in Mexico, firms started about 15 years ago to hire more workers under the ‘honorarios’ plan, in which usually there is no contract and companies pay the workers on a per-hour or per-day basis rather than on the weekly, biweekly, or monthly basis usual with signed contracts.

Under the ‘honorarios’, companies do not have to register their personnel at the IMSS. Firms tend to choose the ‘honorarios’ regime because it adds flexibility to their labor needs as it is easier for them to discharge workers than under the ‘formal’ hiring procedure. Nevertheless, the number of IMSS affiliates is a relevant indicator of employment conditions in Mexico and serves as a complement to the unemployment rate to assess the labor market situation across the nation. In fact, the federal government uses the number of IMSS affiliates to set employment goals for the administration.

15



Figure 24: Formal employment % yoy

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Dec-

05M

ar-0

6Ju

n-06

Sep-

06De

c-06

Mar

-07

Jun-

07Se

p-07

Dec-

07M

ar-0

8Ju

n-08

Sep-

08De

c-08

Mar

-09

Jun-

09Se

p-09

Dec-

09M

ar-1

0Ju

n-10

IMSS Workers INEGI's Employed Population

Source: IMSS and INEGI.

Wealth Distribution Mexico has a Gini coefficient of 48.2. This is the 110nd highest in the world and midtable among the region. This compares to a highest/worst of 70.7 (Namibia) and a lowest/best of 0.23 (Sweden). Mexico’s Gini level has been improving, from 0.53, for example, in 1998. This index measures the degree of inequality of family income. Perfectly distributed income would gather a score of 0.

Figure 25: Gini Coefficient Comparison in US and LatAm

58.5 58.2 56.7 55.1 53.8 53.2 52.4 52.4 51.0 49.6 48.2 48.0 47.1 46.9 45.7 45.041.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Colom

bia

Boliv

ia

Braz

il

Guat

emala

Hond

uras

Para

guay

Chile

El S

alvad

or

Pana

ma

Peru

Mex

ico

Costa

Rica

Urug

uay

Ecua

dor

Arge

ntina

Unite

d St

ates

Vene

zuela

Countries LatAm average

Source: CIA World Factbook, 2005-09.

Protection of the poorest has improved substantially since the 1995 crisis, but safety nets for the moderately poor remain small. Government spending on social programs (Desarrollo Social budget category) is currently more than double in real terms than it was in 1995 at the onset of the ‘tequila’ crisis. The targeting of poverty reduction programs has also improved, which has contributed to a decline in poverty. The government

is also controlling prices of selected foodstuffs consumed by the poor. Currently 3 out of 10 Mexicans received aid from the Federal Government via Oportunidades.

Figure 26: Poverty levels % of total population

53 52

6964

54 50 47 4743

47

21 21

3733

2420 17 18

1418

0

10

20

30

40

50

60

70

80

1992 1994 1996 1998 2000 2002 2004 2005 2006 2008

Income poverty Food poverty

Source: CONEVAL.

Figure 27: Social spending by type % of GDP

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2003 2004 2005 2006 2007 2008 2009 2010

Education Health Social Security Housing Water infrastructure Social Assistance Source: Centro de Estudios de las Finanzas Públicas.

The main poverty reduction programs are:

The Oportunidades program provides means-tested cash transfers to lower-income families conditional on children’s regular school attendance and comes with a basic health coverage package. It covered about 5.8 million families in 2010, with positive effects on school attendance and health, in particular that of girls.It represented around 0.5% of GDP as of 2010.

The Seguro Popular provides voluntary health insurance for people without access to social security. It covered about 50 million people – mainly lower-income families – in 2010 and has been shown to have reduced the incidence of high health spending among the poor.

16



The Procampo program, a part of the Programa Especial Concurrente of over 100 rural support programs, was introduced in 1993 to compensate farmers with cash subsidies for the elimination of input subsidies, price support, and import protection as a result of Mexico’s entry into NAFTA.

Competitiveness Mexico ranks 66th in the 2010-2011 World Economic Forum (WEF) Global Competitiveness Index, out of 139 countries, flat versus the prior-year rank. This is lower than Brazil (ranked 58th, flat from prior year). Other LatAm country rankings were Argentina (87th), Venezuela (122th). Only Chile (30th) appears among the top 30 performers globally.

Mexico scores better than average on macro stability, trade agreements, a large domestic market, a diversified and fairly sophisticated business sector, and comprehensive value chain breadth.

The most problematic factors constraining business that were highlighted by survey respondents: inefficient government bureaucracy, corruption, and crime and theft. Aspects where Mexico ranks poorly (below its overall 60th place are burden of government regulations (116st), together with the business cost of crime and insecurity (132th). Also poorly ranked are Mexico’s hiring and firing practices (120th) and extent of market dominance (127th), with widespread red tape and insufficient competition. Last but not least, the tertiary education and training system (80th) does not seem to provide the economy with the necessary pool of skilled labor, notably scientists and engineers (89th), and is not creating an environment conducive to adopting new technologies (71st in the technological readiness pillar) and generating new ones (78th in the innovation pillar).

Figure 28: Global Competitiveness Index 2010-2011 rankings Index

4.74.3 4.3 4.3 4.2 4.2 4.1 4.1 4.0 4.0 4.0 3.9 3.7 3.7 3.6 3.5 3.5

1.01.52.02.53.03.54.04.55.05.56.0

Chile

30

Pana

ma 5

3

Costa

Rica

56

Braz

il 58

Urug

uay 6

4

Mexic

o 66

Colom

bia 68

Peru

73

Guate

mala

78

El Sa

lvado

r 82

Arge

ntina

87

Hond

uras

91

Dom.

Rep

ublic

101

Ecua

dor 1

05

Bolivi

a 10

8

Para

guay

120

Vene

zuela

122

Score LatAm Mean

Source: World Economic Forum.

A comparison of sources of growth among emerging markets shows that weaker labor productivity is the principal reason accounting for Mexico’s relatively poor performance. Labor productivity growth was slightly negative over the past 20 years in Mexico, while it was the main driver of growth in the better-performing economies.

Figure 29: Sources of Growth Average Growth, 1987-2007

Source: OECD, National Accounts, World Bank.

An important factor explaining slow convergence in Mexico is restrictive product market regulations (PMR) that tend to capture many structural weaknesses. Mexico’s PMR level is one of the most restrictive in the OECD (Figure 30). PMRs reduce competition that would motivate firms to enhance productivity by adopting new technologies and processes.

Regulation can also have ‘knock-on’ effects in nonregulated sectors of the economy that use the output of the regulated sectors as intermediate inputs. The regulatory impact of PMR in Mexico is above the OECD median for all industries, except in real estate and business services. The largest negative impact is in the

17



network industries (electricity, gas, and water), with the regulatory impact of PMR in Mexico fourfold compared to the OECD median.

Figure 30: Product Market Regulation (1)

-0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

US UKCa

nada

Neth

erlan

dsSp

ainDe

nmar

kJa

pan

Norw

aySw

itzer

land

New

Zeala

ndSw

eden

Germ

any

Italy

Belgi

umPo

rtuga

lFr

ance

Kore

aCh

ileM

exico

Braz

ilPo

land

Turk

eyGr

eece

2008 1998 Source: OECD. (1) The scale of the indicator is 0-6 from least to most restrictive of competition.

Figure 31: Cost of enforcing contracts as % of total debt values

0 10 20 30 40 50 60

PanamaColombiaJamaica

Venezuela, R.B.Haiti

Dominican RepublicIndiaPeru

HondurasBolivia

Czech RepublicMexico

Latin America & CaribbeanSweden

ParaguayItaly

ChileBelize

EcuadorIreland

NicaraguaGuatemalaSingapore

Puerto RicoIsrael

NetherlandsSwitzerland

United KingdomJapan

CanadaAustralia

Hong Kong SAR, ChinaEl Salvador

UruguayAustriaFrance

SpainBelgium

ArgentinaBrazil

GermanyGreece

United StatesCroatia

Russian FederationFinland

PortugalPolandChina

Korea, Rep.Norway

LuxembourgIceland

Source: World Bank.

Security The Calderon Administration has made combating the illegal drug trade a priority. Murders related to narcotics rose from 2,826 in 2007 to 15,273 in 2010, according to Mexico’s Instituto Ciudadano de Estudios Sobre la Inseguridad (ICESI).

Figure 32: Murders related to narcotics

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: ICESI, Federal Government, J.P. Morgan.

Kidnapping is also a major concern. Last year the ICESI reported that 15,273 kidnappings took place in 2010, the highest level since records began. Whilst likely under-reported, the trend is a concern.

Figure 33: Kidnapping in Mexico (cases)

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-

200

400

600

800

1,000

1,200

1,400

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Kidnaps % Change yoy Source: ICESI.

The economic cost could be relevant. According to the IADB, the cost of security in Mexico could reach 15% of GDP, the second highest in Latin America, behind Colombia (25% of GDP).

In the 2010 Latinobarometro regional survey, 30% of Mexican respondents said they had been victims of a crime in the last 12 months. El Salvador (71%) and Argentina (36%) led the polls. The regional average stands at 31%. In the same survey, crime was seen as the most important problem facing the country.

18



Figure 34: Crime in Mexico Victim of Crime in last 12 months (Blue) vs Crime as biggest issue for country (Grey)

0

10

20

30

40

50

60

70

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Latinobarometro 1995-2010.

There is a sharp divergence in reported levels of violence between states, with Chihuahua, Sinaloa, and Durango seeing the highest murder rates, over double the national average of 37.1 murders per 100,000. This 37.1 rate compares to reported higher rates in El Salvador (71), Honduras (67), and Guatemala (52). Most LatAm countries have much lower rates, such as Brazil at 22, Argentina 5.5, and Chile 1.7. Murder rates in Mexico City were significantly below the national average.

Figure 35: Murders per 100,000 inhabitants, as of 2010

0.0 50.0 100.0 150.0

YucatánVeracruz

CampecheMéxico

HidalgoBaja California Sur

QuerétaroPuebla

Distrito FederalOaxaca

ZacatecasAguascalientes

GuanajuatoColimaJalisco

CoahuilaTabasco

Baja CaliforniaNuevo León

San Luis PotosíChiapasTlaxcala

National AverageTamaulipas

SonoraQuintana Roo

MichoacánNayarit

GuerreroMorelos

DurangoSinaloa

Chihuahua

Source: ICESI.

19



Economy Mexico is the second-largest economy in Latin America and the 14th in the world. It has been a quite open economy since 1996, when NAFTA – signed back in 1993 – really kicked in. This, combined with Mexico’s strategic geographical location, has made the economy strongly dependent on US business cycles. Particularly, manufacturing activity in Mexico is tightly linked to the US.

Table 7: Top 15 Countries in the World, Ranked by GDP

Nominal GDP,

US$ bn Population,

mn Nominal GDP

per capita, US$ U.S. 14,441 310 47,132 China 4,909 1,341 4,283 Japan 4,326 127 42,325 Germany 3,653 82 40,512 France 2,853 63 40,591 U.K. 2,646 62 36,298 Italy 2,293 60 33,829 Brazil 1,613 193 10,471 Canada 1,608 34 45,888 Russia 1,604 140 10,522 India 1,400 1,216 1,176 Spain 1,217 46 29,875 Australia 1,086 22 54,869 Mexico 1,015 109 9,243 Korea 929 49 20,165

Source: International Monetary Fund. Data for 2010

The Mexican economy is focused on the service sector, which in 2010 made up 64% of GDP. The service sector employs 27.9 million people, accounting for 62.4% of the country’s total workforce.

The industrial sector represents 30% of Mexican GDP. This proportion has been relatively stable since the 1980s. Manufacturing is the most important industry in this sector, making up around 17% of total GDP, followed by construction (6%), mining (5%), and electricity, gas, and water at 2%, as of 2010. This sector employs 10.6 million individuals; 23.7% of the total workforce.

The primary sector is a small part of the Mexican economy, representing less than 5% historically, and employs around 5.9 million people; 13.2% of the workforce.

Table 8: Services sector breakdown % Services % GDP

Commerce/trade 25.8 15.7 Real estate 16.0 9.7 Transport, mailing and storage 10.9 6.6 Education services 8.0 4.9 Government 6.9 4.2 Financial services and insurance 5.8 3.5 Media 5.1 3.1 Professional, scientific & tech 4.8 2.9 Health & social services 4.5 2.7 Other services ex government 3.8 2.3 Business support and waste management 3.7 2.3 Accommodation & food services 3.5 2.1 Corporate services 0.6 0.4 Recreation & cultural services 0.6 0.3 Source: INEGI. Data as of 2010.

Mexico is a consumption-driven economy, with private and government consumption making up 80% of GDP – private 69% and government 11%. Gross fixed capital formation make up 21% of the GDP, and this share has been increasing since 1995, when it made up around 14%.

Mexico’s external sector is especially linked to the US economy, which is the destination for around 80% of total exports. The largest export items to the US are electric machinery and transport vehicles. Mexico is a country with one the highest number of free trade agreements worldwide. The country also enjoys an enviable geographic position relative to the world’s largest economy, compared to those of other trade-oriented economies.

Mexican imports are more diverse (on a geographical basis) than its exports; US imports to Mexico make up around 50% of total imports, and this share has been decreasing, down from 75% in 2000. Currently, imports from China are gaining importance. In 2000, less than 2% were from China; nowadays imports from China make up around 15%. On a product basis Mexican imports are focused on electric machinery mainly, making up 39% of total imports last year.

20



Table 9: Economic Summary

Avg 04-08 2009 2010 2011F 2012F

Real GDP, MXN$ Bn 8,452 8,399 8,854 9,251 9,573 Nominal GDP, US$ BN 938 883 1,040 1,156 1,293 GDP per capita - US$ 8,801 8,057 9,395 10,341 11,447 Real GDP, % change 3.4 -6.1 5.5 4.5 3.5 Contribution to GDP growth Consumption 3.1 -4.6 3.8 3.4 2.5 Investment 0.9 -3.7 1.5 0.6 0.6 Net trade -0.6 2.2 0.3 0.5 0.5 Consumer prices, %oya 4.3 5.3 4.2 3.5 3.3 % Dec/Dec 4.6 3.6 4.4 3.7 3.5 Producer prices, %oya 5.4 4.9 3.8 4.5 4.1 Gov balance, % of GDP -0.1 -2.3 -2.8 -2.5 -2.0 Industrial production, %oya 2.8 -7.4 6.1 5.3 3.4 Unemployment rate, % 3.5 4.8 4.9 4.2 3.5 Exchange rate, units/$, eop 11.5 13.1 12.3 12.0 11.5 Trade balance (US$ bn) -10.0 -4.6 -3.1 -6.6 -13.3 Exports 243.1 229.8 298.4 325.2 349.1 Imports 253.0 234.4 301.5 336.1 367.0 Current account balance -8.0 -6.3 -5.7 -11.0 -18.0 % of GDP -0.8 -0.7 -0.5 -1.2 -1.6 Int. reserves, (US$ bn) 72.3 90.8 113.6 134.9 143.8 Total ext debt, (US$ bn) 180.6 195.7 210.7 217.7 218.7 Short term1 38.5 38.1 58.1 65.1 66.1 Total ext debt, % of GDP 18.8 22.5 19.5 17.7 16.8 Total ext debt, % of exp (2) 61.0 73.1 59.6 57.4 54.9 Interest payments, % exp (2) 4.6 4.3 3.7 4.2 3.0

Source: J.P. Morgan. 1.Debt with original maturity of less than one year. 2. Exports of goods, services, and net transfers.

Financial System Mexico’s financial system is made up of banks, credit organizations, insurance companies, brokerage firms, pension fund and mutual fund managers, as well as of regulatory and supervisory institutions: SHCP (Ministry of Finance – the highest authority in the financial system), Banco de México (the central bank), CNBV (National Banking and Securities Commission), CNSF (National Commission of Insurance Companies), CONSAR (Pension Funds regulatory body), CONDUSEF (Consumer Credit Protection Agency), and IPAB (Savings Protection Institute).

The CNBV regulates credit institutions, auxiliary credit organizations, and securities organizations; CNSF regulates insurance companies; and CONSAR regulates the Mexican pension funds (Afores and Siefores). It is worth noting that Afores are the pension fund administrators and Siefores are the pension fund portfolios.

Figure 36: Financial system assets breakdown

Banks, 50%

Pension Funds, 13%

Mutual Funds, 11%

Development Banks, 10%

Insurance Companies,

6%

Brokerage Houses, 4%

Non Banks Banks, 4%

Others, 2%

Source: Banco de México. Data for 2010.

The Mexican banking system is well capitalized (capital/risk-weighted assets ratio of 11%), with nonperforming loans at 2.8% of total (Dec 2010) and provisioning levels of over 184%. Profitability levels are reasonably poor, with a 1.3% ROA and 13% ROE.

Figure 37: Nominal loans growth rate by type

-70%

-50%

-30%

-10%

10%

30%

50%

70%

90%

Dec-

95Se

p-96

Jun-

97M

ar-9

8De

c-98

Sep-

99Ju

n-00

Mar

-01

Dec-

01Se

p-02

Jun-

03M

ar-0

4De

c-04

Sep-

05Ju

n-06

Mar

-07

Dec-

07Se

p-08

Jun-

09M

ar-1

0De

c-10

Housing loans growth rate, yoy Consumption loans growth rate, yoy

Corporate loans growth rate, yoy Total loans growth rate, yoy Source: Banco de México.

21



Figure 38: Delinquency rates by type of loan

0%5%

10%15%20%25%30%35%40%45%50%

Dec-

95O

ct-9

6Au

g-97

Jun-

98Ap

r-99

Feb-

00De

c-00

Oct

-01

Aug-

02Ju

n-03

Apr-

04Fe

b-05

Dec-

05O

ct-0

6Au

g-07

Jun-

08Ap

r-09

Feb-

10De

c-10

Housing loans delincuency rates Consumer delincuency rates

Corporate loans delincuency rates Total loans delincuency rate Source: Banco de México and ABM (Mexican Bankers’ Association).

Table 10: Comparative LatAm Bank Metrics, October 2010 report

Capital / RWA

Capital / Assets

NPL / Loans

Provision / NPL ROA ROE

Argentina 18.4% 12.3% 2.7% 134% 2.4% 19.7% Brazil 17.5% 9.1% 3.8% 161% 2.2% 24.0% Chile 13.6% 7.0% 3.3% 77.5% 1.6% 20.6% Colombia 12.8% 13.6% 4.4% 128% 2.9% 20.9% Mexico 16.4% 9.7% 2.8% 184% 1.3% 12.9% Peru 14.3% 10.0% 3.0% 118% 2.4% 24.1%

Source: IMF Global Financial Stability Report.

With US$447 billion in assets, the Mexican financial system is dominated by foreign-controlled banks, which make up over 74% of system assets. BBVA-Bancomer (21.8%) and Citibank-Banamex (20.8%) are the two largest banks in the country.

Figure 39: Top 10 banks in Mexico

22% 21%

13%10%

8%5% 4%

2% 2% 2%

0%

5%

10%

15%

20%

25%

BBVA

Ba

ncom

er

Bana

mex

Sant

ande

r

Bano

rte

HSBC

Inbu

rsa

Scot

iaban

k

ING

IXE

Banc

o del

Bajío

Source: CNBV, 2010 Data

Credit penetration in Mexico is low by both global and regional standards, at around 16% of GDP versus over 55% in Brazil and over 70% in Chile. This low penetration level is partly explained by the Mexican devaluation and subsequent banking crisis of 1995.

Figure 40: Bank Credit to Private Sector % of GDP

71%

45%

37% 35% 34%

23% 23%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Chile

Braz

il

Peru

Colo

mbi

a

LatA

m A

v

Arge

ntin

a

Vene

zuel

a

Mex

ico

Source: J.P. Morgan. Data for 2010.

Figure 41: Share of Loans Held in Subsidiaries of Foreign Banks % of System Loans

68%

55%49%

43%

32% 31%

19% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Mex

ico

Colo

mbi

a

Chile

Peru

Arge

ntin

a

LatA

m A

v

Vene

zuel

a

Braz

il

Source: J.P. Morgan. Data for 2010.

Public confidence in the banks is reasonably low, likely a reaction to the 1994-1995 ‘tequila’ crisis. The 2008 Latinobarometro survey showed that only 37% of Mexican respondents trusted the banks, below LatAm’s average of 44% (up from a low of 29% in 2003). Chile has the highest banking sector confidence, at 55%, in line with its greater banking penetration. In contrast – for example – overall confidence in the private sector in Mexico was lower (35%) as well as below the LatAm average (41%). Oddly enough, confidence in the private sector was highest in Venezuela (58%).

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Figure 42: Banking-Sector Confidence How much confidence do you have in the banking sector?

Source: Latinbarometro 2003-2008.

Financial Stability Council Back in May 2010, Central Bank Governor Carstens urged the government to form a committee of various government entities to identify and analyze significant risks that could cause disruptions in the financial system and could eventually pose major risks to the economy as a whole. On July 29, 2010, President Calderón announced the creation of the Financial Stability Council (FSC), with Minister of Finance Cordero as head of the council.

On April 4, 2011, members of the FSC delivered their first annual report to President Calderón. The main conclusion of this 56-page comprehensive report was that even though the council did identify several important risks that could affect the Mexican economy – such as an abrupt reversal of portfolio inflows, the European sovereign crisis, a sudden deceleration of global economic activity – the impacts of these would be limited even if realized. One of the vulnerabilities observed during the most recent global financial crisis was the FX derivative structures of some Mexican corporates. This was one of the main drivers of USD/MXN volatility in 2008-2009.

It was later decreed that publicly listed firms – the primary corporates in question – must report details of their open derivatives positions to the National Banking and Securities Commission (CNBV) on a regular basis. According to data presented by the FSC, these derivative positions declined to US$409 million in 3Q10 from US$11.5 billion in 3Q08.

Figure 43: Corporate FX derivatives exposure

11,548

3,2201,347

4090

2,500

5,000

7,500

10,000

12,500

3Q08 4Q08 1Q09 3Q10

US$ mn

Source: Financial Stability Council Annual Report 2010.

Pension Funds Mexico has a fully-funded compulsory contribution private pension fund system, with individual accounts. This was introduced in 1997, to replace the previous ‘pay-as-you-go’ system, and is based on the Chilean model introduced in 1980 and widely adopted across the region. Workers and employers each contribute with 8.5% of workers’ monthly wages. The private pension managers running these funds are known as ‘Afores’. There are currently 14 Afores in existence, with the top 5 being Banamex, ING, Bancomer, Banorte Generali, and Inbursa.

Table 11: Mandatory Contribution Private Pension Funds System Assets Under Management US$ bn

2005 2006 2007 2008 2009 2010

Argentina 23 29 30 - - - - - - Chile 75 89 111 74 118 148 Colombia 16 19 25 26 40 51 Mexico 55 67 76 68 88 112 Peru 9 14 20 17 24 31 Uruguay 2 3 3 3 5 7 Total 180 221 265 188 275 349

Source: J.P. Morgan, AIOS (International Association of Pension Fund Regulators).

With around US$114 billion in assets under management (February 2011), private pension funds (Afores) have played a major role in the development of local markets, particularly the bond market, over the past 10 years. The Mexican system has in excess of 41.3 million affiliates (by far the greatest in the region, with Colombia the next nearest at 8.9 million), of which 15 million are regular contributors. The average bimonthly contribution inflows have been averaging around US$2 billion.

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Table 12: Pension Fund Holdings Billion pesos as of February 2011

MXN Exposure1 %

Total investment 1,383 100.0 Fixed-income 1,136 82.2 Government Securities 813 58.8 Cetes (Treasury bills) 77 5.6 Mbonos (Government bonds) 297 21.5 Floating-rate bonds 109 7.8 Udibonos (Inflation-linked) 270 19.5 Repo operations 22 7.8 UMS global bonds 37 2.7 Non-government securities 324 23.4 Equities 247 17.8 Local 115 8.3 Foreign 132 9.5

Source: Consar. 1. Percentage of total net assets under management plus accountable commissions; used to set the investment regime limits. The system was reformed in March 2008, from a two-fund asset allocation model to one offering five funds (‘multifunds’), with distinct risk/return asset allocations. Fund 1 is the most conservative – cannot hold equity positions – and is held by contributors age 56 and over. By contrast, Fund 5 is the most aggressive and has the highest equity exposure (13.2% in local equities versus a system-weighted average of 8.3%), with an equity limit of 35%, and is held by those less than 26 years old.

Table 13: Pension Fund Equity Holdings by Type of Fund % of total AUM, as of February 2011

1 2 3 4 5 Total investment 100.0 100.0 100.0 100.0 100.0 Government Securities 71.6 62.0 57.6 52.4 54.5 Cetes (T-bills) 2.8 7.3 5.5 4.1 5.1 Mbonos (Bonds) 15.5 22.9 23.0 20.0 26.6 Floating-rate bonds 16.7 6.7 7.0 7.1 4.5 Inflation-linked 35.4 21.4 18.0 16.0 11.7 Private securities 26.7 23.6 23.9 22.7 20.0 Equities - 14.4 18.5 24.8 25.5 Local - 6.9 8.3 11.4 13.2 Foreign - 7.5 10.2 13.5 12.3

Source: Consar (Pension Funds Regulatory body).

In terms of daily risk tolerance, measured by Value-at-Risk (VaR), the most conservative fund, Fund 1, can only have up to 0.6% daily VaR (95% confidence level), while the most aggressive, Fund 5, can post a 2% daily VaR on its portfolio. This new breakdown into five

different funds has given more room for diversification and risk taking (see Annex 1).

Equity allocations are low by regional and global standards, and the regulator has been gradually liberalizing the system to encourage greater equity allocations. Pension funds were historically only approved to own certain equity ETF's or trackers by the regulator CONSAR (Table 14). However, reforms introduced in 2010 allow the pension funds to purchase individual stocks, with up to a +/-4% difference from the weights indicated by the approved indices.

Table 14: Authorized Mexican equity indices IPC (Índice de Precios y Cotizaciones) IPC MidCap IMC 30 (Índice de Mediana Capitalización) IPC SmallCap IMeBz (Índice México-Brazil) IRT CompMX IMeBz RT (Índice México-Brasil de Retorno Total) IRT LargeCap BMBra 15 (Índice BMV Brazil 15) IRT MidCap BMBra 15 RT (Índice BMV Brasil 15 RT) IRT SmallCap IR RT (Índice BMV-Rentable) INMEX IPC CompMX INMEX RT IPC LargeCap Dow Jones México

Titans 20 Index Source: J.P. Morgan.

The objective of this measure is to improve the flexibility and efficiency of equity investments, which should eventually lead to higher equity exposure. As of February 2011, total equity exposure of the combined portfolio of pension funds stood at 17.8%, with 8.3% in local stocks and 9.5% in international equities. In fact, pension funds’ equity exposure has been consistently increasing from the 8.8% posted back in February 2009, and now is at historical highs.

Finally, in addition to the Afores, which manage private-sector employee funds only, the reform of the pension system for public-sector employees (ISSSTE reform) incorporated US$3.2 billion into the system back in December 2008. The so-called PensionISSSTE started fully invested in government securities but has been slowly diversifying its portfolio over the last two years. It is worth noting that most of its incoming accounts have been building positions in the most aggressive funds, while accounts in the least aggressive funds have remain relatively unchanged. However, starting in 2012, PensionISSSTE will be able to receive contributions from private-sector employees, and all workers, public or private, will choose among all existing pension funds (including PensionISSSTE).

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Mutual Funds The mutual fund industry has nearly US$102 billion of AUM, as of February 2011, making it not dissimilar in size to the better-known Afores pension fund system. As of 2010 the mutual fund industry represented 9.8% of GDP.

Total AUM had been increasing steadily until the most recent global financial crisis, in 2008/2009, which hurt AUM growth rates. Since mid-2009, however, growth rates have recovered considerably. As of February 2011, there were 515 mutual funds registered in Mexico.

Figure 44: Mutual Funds AUM growth rate yoy

Source: AMIB (Mexican Association of Financial Intermediaries).

The mutual funds industry had invested in equities in a conservative fashion. For the 1996-2006 period, the share of total AUM invested in equities was 15%, and currently this share is 17.2%, in line with the Afores. However, between 2Q07 and 4Q07 this weight was close to 20%, but in 2008 it started to decrease, as risk aversion increased and equities performed poorly.

Figure 45: Mutual fund investment in equity as a % of total AUM

Source: AMIB.

Capital Markets Mexican Bolsa has 105 listed companies and around 406 listed share series and other instruments. This compares to 386 listed in Brazil and 236 listed in Chile. The number of overall instrument listings has actually been rising strongly in Mexico – from only 177 in 2000 – whilst it has been falling in Brazil – from 467 in 2000.

Figure 46: Number of listed entities

0

100

200

300

400

500

600

700

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Brazil Argentina Colombia

Peru Mexico Chile Source: World Federation of Exchanges.

Daily exchange traded volume is not well reflected in the high number of listed companies, with Brazil’s daily volume dramatically higher. Daily traded volume reported to the World Federation of Exchanges averaged only US$84m in 2009, compared to US$626m in Brazil.

Figure 47: Average Daily Value of Shares Traded US$ Millions

0100,000200,000

300,000400,000

500,000600,000

700,000800,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Brazil Argentina Colombia

Peru Mexico Chile Source: World Federation of Exchanges.

New issuance has picked up. 2010 saw six IPOs and nine “CKDes” (equity-linked notes) raising US$3.5bn, a record. The Mexican Stock Exchange has stated that it expects at least a similar amount this year, with activity in the airline sector in 1H and confidential filings being made now for 2H. Tax and regulatory changes may also

25



see a number of CKDes issues come to market as more liquid Fibras, equivalent to real estate investment trusts. Fibra Uno (FUNO11 MM) recently listed, raising US$300m. IPOs are being driven by high valuations (15x fwd P/E), by a consolidation and acceptance of the 2006 Securities Market Law corporate governance changes, by the work the Bolsa has done to educate companies and promote the exchange, and by generational change at family-owned companies. Table 15: Mexico IPOs in 2010

Source: Mexican Stock Exchange.

Table 16: Mexico CFK Issuance in 2010

Source: Mexican Stock Exchange. This process has a long way to go, however, with Mexico’s weight in the MSCI EM index at 4.4%, less than half the level 10 years ago. This reflects the greater issuance, market performance, and liquidity increase in other emerging markets.

Figure 48: Mexico weight in MSCI EM Index, vs Brazil

2.0%

5.0%

8.0%

11.0%

14.0%

17.0%

95 97 98 99 00 01 02 04 05 06 07 08 09 11

Brazil Weight in EM

Mexico Weight in EM

Source: J.P. Morgan, MSCI.

The Mexican stock market has 105 listed companies, and the market cap/GDP is around 40% of GDP. The Indice de Precios y Cotizaciones (IPC), the benchmark index of the Mexbol, is composed of 37 stocks, and it’s a free float market capitalization weighted.

The Mexico MSCI index is also widely used. It is composed of 23 companies, and is free float market capitalization weighted.

Table 17: IPC and MSCI top 10 constituents Companies MSCI share IPC share

America Movil 32.0 24.6 Walmex 10.6 11.7 Femsa 7.6 7.4 Grupo Mexico 7.1 7.0 Grupo Televisa 6.0 5.9 Cemex 4.7 4.8 Banorte 4.5 4.0 Telmex 2.9 2.5 Inbursa 2.4 2.8 Alfa 2.4 4.2 TOTAL 80.1 74.9 Source: J.P. Morgan estimates.

The Mexican market is very concentrated (over 40% of index weight in only two stocks – America Movil and Walmex. It is also filled with more domestic defensive sectors (61% of the index), such as telecoms and staples. These have been growing in importance over time – from under 40% in the mid-1990s. This has helped give the market a beta of less than 1.0x. This is in contrast to Brazil, for example, which is very commodity heavy (50% of index, despite exports/GDP of only around 10%).

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Table 18: MSCI Mexico Sector Weights Sector % Weights

Discretionary 11.5 Staples 23.4 Financials 5.2 Industrials 4.1 Materials 15.8 Telecoms 39.9 Total 100.0 Source: MSCI.

Figure 49: Mexico Defensive Weight: 60% of the Index

Source: MSCI and DatastreamThe exchange also has an international segment – the Global BMV Market – which is a mechanism designed to list and trade, on the Mexbol, securities that were:# Not subject to a public offering in Mexico.

# Not listed in the Securities Section of the National Securities Registry.

# Listed on foreign securities markets that have been recognized by the National Banking and Securities Commission (CNBV) (Recognized Foreign Markets) or whose issuers have received the relevant recognition of said Commission (Recognized Foreign Issuers).

There are 579 securities trading in this market. 87% are US securities, 10% are European securities, 1% Asian and the rest Australian and Canadian securities. The value traded in this market accounts for around 15% of total BMV.

ETFs in Mexico are growing in importance, as many investors prefer to invest in broader instruments rather than stock pick. This is particularly true for the Afores. The ETF industry in Mexico is composed mainly of three highly traded vehicles, EWW (average daily trading volume –ADTV– of US$168m), NAFTRAC (ADTV of US$181m), and ILCTRAC (ADTV of US$8m).

There are another four ETFs that seek to replicate a Mexican Index – like IMCTRAC, IHBTRAC, and

ICMTRAC – but none of these is very liquid. EWW is the oldest ETF and is composed of a broader range of securities, 44; while NAFTRAC just has 37 stocks but is the most traded by local investors.

Figure 50: Invested amount in domestic equities by the Afores vs. Naftrac 6M moving average ADTV

-

10

20

30

40

50

60

70

80

90

10

30

50

70

90

110

130

Oct-02Jan-03Apr-03Jul-03Oct-03Jan-04A pr-04Jul-04Oct-04Jan-05A pr-05Jul-05Oct-05Jan-06A pr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08A pr-08Jul-08Oct-08Jan-09A pr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11

Millio

ns of

share

s

Ps bi

llions

Invested amount in dom equities by Afores

Naftrac 6M Av Daily Traded Volume

Source: J.P. Morgan estimates, company data.

Stock Exchange regional business opportunities, rather than integration. The Mexican Bolsa has vendor and risk management businesses in Mexico, Brazil, and Colombia, and it is working on co-operation agreements with Chile and Brazil. This segmented and business development approach is in contrast to the deeper integration trends seen recently with the Andean stock exchange initiative or the Bogota / Lima stock exchange merger. Fiscal Policy Mexico’s fiscal deficit – including Pemex’s investment – is expected to decrease to 2.5% of GDP this year from 2.8% in 2010. Latin America’ fiscal deficit to GDP also should be around 2.5%, ranging from a 0.3% deficit in Peru up to a 4.1% deficit in Colombia. Mexico and EM indebtedness pales in comparison with the fiscal deficit of 7.3% of GDP that developed markets are expected to register this year, in aggregate.

Table 19: LatAm Fiscal Deficits Budget balances (% of GDP)

2010 2011F 2012F Latin America -2.6 -2.5 -2.0 Argentina -1.0 -1.5 -0.5 Brazil -2.6 -2.9 -2.1 Chile -1.0 -0.5 0.5 Colombia -4.1 -4.1 -3.7 Ecuador -3.0 -3.0 -3.0 Mexico -2.8 -2.5 -2.0 Peru -0.6 -0.3 0.0 Venezuela -5.0 -2.5 -4.0

Source: J.P. Morgan.

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Breakdown of Mexico fiscal income and expenditures: Oil revenues accounted for almost 33% of total government revenues in 2010 (see Table 18), while tax revenues represented 44%. Nonoil nontax revenues represented just 6% of total, and income from other state-owned enterprises (e.g., electricity, water) represented the remaining 17% of the total fiscal revenues.

Total fiscal revenues accounted for 22.6% of GDP last year. Collection of corporate income tax (ISR and IETU), as well as cash deposit taxes, brought in 52% of the total tax revenues in 2010. On the expenditure side, discretionary (‘programmable’) spending represented 79% of total public spending.

It is worth noting that Pemex was able to stabilize crude oil production at 2.5 million bpd in the past few months, a meaningful fiscal support. This was thanks to higher production in the Ku-Maloob-Zaap complex as well as greater production from mature fields, which combined to compensate for the decline of the Cantarell field. (please see the figure below).

Figure 51: Crude oil production Million barrels per day

0.00.51.01.52.02.53.03.54.0

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10Cantarell Ku-Maloob-Zaap Other

Source: Ministry of Energy.

Table 20: Fiscal Revenues and Expenses MXN billions

Fiscal Revenue 2008 2009 2010 Total Income 2,861 2,817 2,960 Oil Revenues 1,055 874 973 % of GDP 8.7% 7.4% 7.4% Non - Oil Revenues 1,806 1,943 1,987 % of GDP 14.8% 16.3% 15.2% Non oil public companies and others 599 818 673 Tax Income 1,208 1,125 1,314 ISR (Income) 562 534 627 IETU (Cash flow) 47 45 45 IDE (Cash Deposits) 18 16 8 IVA (VAT Consumption) 457 408 504 Imports 36 30 25 Net income from oil operations 4 1 2 Other taxes 84 92 103 Oil Revenues as % of Total Income 36.8% 31.0% 32.9% Tax income as % of Total Income 42.2% 39.9% 44.4% Tax income as % of GDP 9.9% 9.4% 10.0% Oil Revenues as % of GDP 8.6% 7.3% 7.4%

Fiscal Expenditure 2008 2009 2010 Total Net Expenses 2,873 3,089 3,334 Programmable expenses 2,210 2,437 2,619 Investment 532 607 646 Current 1,678 1,830 1,972 Wages and personnel services 710 765 800 Other operating expenses 638 695 758 Subsidies and transferences 330 370 414 Non programmable expenses 662 652 715 Financial cost 227 263 256 Participations 423 376 437 Programmable Expenses % Total 77% 79% 79% Source: SHCP and J.P. Morgan.

Comparative tax rates: A small taxpayer base explains why Mexico has such a low tax collection-to-GDP ratio, despite comparatively similar tax rates versus emerging market peers.

Figure 52: Comparative Tax Rates: VAT + Corporate Tax

Source: J.P. Morgan and Deloitte.

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Figure 53: Tax structure trend in LatAm

Source: CEPAL.

Higher oil prices: Even though Mexico is a net oil exporter, it imports around 47% of its gasoline consumption (figure below), given a lack of domestic refining capacity.

Figure 54: Share of imports in domestic gasoline consumption

16.9

24.7

15.89.1

14.7

25.328.4

40.3 42.9 41.447.0

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% of total

Source: Pemex.

Note that the government subsidizes gasoline prices whenever international prices for this fuel are above domestic prices, as they have been since May 2009. In fact, the government spent US$20.5 billion in 2008, US$1.2 billion in 2009, and US$6.1 billion in 2010 on these subsidies (figure below).

Figure 55: Fiscal burden of gasoline price subsidies

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

US$ bn

Source: Ministry of Finance.

Up to the end of February 2011, the government had spent US$1.2 billion YTD on the gasoline price subsidy as the gap between domestic and global gasoline prices has widened significantly since the geopolitical tensions arose in North Africa and the Middle East, and it is currently nearly 20% (figure below).

Figure 56: Low-grade gasoline prices

9.0

11.3

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

13.5

2008 2008 2009 2009 2010 2011

MXN per liter

Mexico

US

Source: J.P. Morgan with data from Pemex and Bloomberg. Note:. Mexico: Magna Sin in Mexico City Metro Area; US: PADD 3 all-grade average price net of taxes.

Note that with the exception of 2009, when gasoline prices were frozen as part of the countercyclical policies to face the economic downturn, the government has been increasing gasoline prices in a gradual fashion over the last years, in order to reduce the fiscal burden coming from higher fuel prices. In this context, the government implemented a MXN 8 cents monthly increase in gasoline prices since the end of 2009. However, given the current high spread, the government could consider increasing the monthly increase if international gasoline prices continue surging. Against this backdrop, we believe the authorities could implement a formal mechanism in the medium term, which incorporates changes in international gasoline prices and smooths them into local gasoline price dynamics.

Sovereign Credit Ratings Mexico is investment grade rated, though this position has been seeing some pressure. Back in late 2009, Standard and Poor’s and Fitch Ratings downgraded Mexico’s sovereign debt rating by one notch, to BBB from BBB+. However, it lifted its outlook to ‘stable’ from ‘negative’. We continue to believe that Moody’s will not follow the Fitch and S&P downgrades, as it has observed a more optimistic appraisal of Mexico’s fiscal pressures. In fact, it has not even changed its outlook from ‘stable’. Moreover, even though Moody’s started with a lower rating compared to S&P (by 1 notch),

29



Moody’s has never downgraded México’s sovereign debt, not even in 1995 when the ‘tequila’ crisis emerged, while S&P did.

Table 21: Mexico Historical Long-Term Sovereign Debt Credit Ratings1

S&P Rate Chg.

Date Moody’s Rate Chg.

Date Fitch Rate Chg.

Date BBB (Stable) 14-Dec-09

Baa1 (Stable)3 5-Aug-09

BBB (Stable) 23-Nov-09

BBB+ (Neg) 11-May-09

Baa1 (Stable) 6-Jan-05

BBB+ (Neg) 11-Nov-08

BBB+ 8-Oct-07 Baa2 6-Feb-02 BBB+ 19-Sep-07 BBB 31-Jan-05 Baa3 7-Mar-00 BBB 7-Dec-05 BBB-.2 7-Feb-02 Ba1 10-Aug-99 BBB- 15-Jan-02 BB+ 13-Mar-00 Ba2 20-Feb-91 BB+ 3-May-00 BB 10-Feb-95 BB 30-Aug-95 BB+ 29-Jul-92 Source: S&P, Moody’s, and Fitch Ratings.1. Outlook between parentheses. 2. 'Investment Grade' is considered to be achieved at a rating of BBB- (Baa3 for Moody's) or above. 3. Moody's Investors Service ratified México's sovereign rating at Baa1 on August 5, 2009. At BBB by S&P, Mexico is rated one notch above investment grade, and we do not foresee any upgrades in the short term. This is in line with Russia, Bulgaria, and Lithuania. It is one notch above Brazil (recently upgraded to BBB by Fitch), Colombia, and Peru (BBB-). Chile is the highest-rated major economy in LatAm (A+).

Currency & Monetary Policy With an estimated daily turnover of more than US$20 billion (US$20 billion in the spot market) the peso is the most liquid currency in Latin America and one of the most liquid globally, just after HKD, NOK, and NZD.

Table 22: Mexico’s Exchange Rate Regimes (1932-2010) 1932-1944 Free floating 1944-1948 Fixed exchange rate1

1948 Free floating 1949-1976 Fixed exchange rate 1976-1977 Free floating 1977-1982 Fixed exchange rate 1982-1991 'Dual' exchange rate 1991-1994 Crawling peg with the US dollar 1994-2008 Free floating with some FX interventions 1998-2008 Free floating 2008-2010 Free floating with some FX interventions2

1. Mexico was part of the Bretton-Woods agreement. 2. The Foreign Exchange Commission (FEC) decided to intervene in the FX market to stabilize the exchange rate amidst the Global Crisis that started in the US subprime housing market. Source: Banco de México, Ortiz, Guillermo, and Leopoldo Solís ‘Estructura Financiera y Experiencia Cambiaria: México 1954-1977’, Documento de Investigación, 1978-01, Banco de México, 1978.

Since the adoption of the free-floating exchange rate regime back in December 1994, there have been no restrictions on buying/selling the peso freely. Until October 2008, Banco de México’s only mechanism of intervention was through daily dollar sales by predetermined amounts announced every three months in the event of FX reserves accumulation (from Pemex, mostly). This mechanism was suspended by the Exchange Commission at the end of July 2008 as a means to compensate for the drop in reserves caused by a US$8 billion sale to the Finance Ministry (Hacienda). Since October 2008 Banco de México has intervened in the spot market through discretionary and rule-based USD sales aimed at providing liquidity and smoothing volatility.

In this context, the Foreign Exchange Commission (FEC) – formed by the MoF and Banco de México – decided to implement the FX options mechanism to accumulate foreign reserves in March 2010. Since then, the central bank has been selling US$600 million worth of USD put/MXN call options to local financial institutions every last business day of the month. For one month, options owners are able to exchange US dollars for pesos with Banco de México at the previous day’s ‘fixing rate’ (i.e., the strike price) whenever they decide to exercise the options. We highlight that the ‘exercise window’ of these options is ‘open’ if the reference rate (i.e., the previous day’s ‘fixing’ rate) is below or at the 20-day moving average rate. This provides a structure that allows the monetary authority to acquire US dollars from market participants whenever there is ‘an excess supply’ of dollars, minimizing the impact that the central bank might have during these interventions.

This mechanism is not new. In fact, this framework worked from August 1996 to June 2001. In this ‘new era’, Banco de México has accumulated slightly more than US$30 billion in foreign reserves in 2010 and 2011 to date, making the central bank’s international assets reach an all-time historical high of US$122.1 billion.

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Figure 57: Banco de México foreign reserves

5060708090

100110120130

2007 2008 2009 2010 2011

US$ billion

122.1

Source: Banco de México.

Nevertheless, the central bank has only accumulated about US$5.9 billion from the options mechanism since 2010 (table below).

Table 23: Banco de México’s foreign reserves accumulation US$ bn

Breakdown

Reserves Chg Pemex Government1 Market

operations2 Other3 2005 68.7 2006 67.7 -1.0 26.7 -23.4 -8.0 3.7 2007 78.0 10.3 12.9 -4.2 -4.2 5.9 2008 85.4 7.5 22.8 -5.4 -18.7 8.8 2009 90.8 5.4 11.5 6.6 -16.2 3.5 2010 113.6 22.8 16.0 2.3 4.5 -0.1 Mar-11 122.1 8.5 1.0 5.6 1.4 0.4

Source: J.P. Morgan with data from Banco de México. 1. Includes government's short-term liabilities. 2. Includes Banco de México's US dollar sales to Mexican financial institutions as well as the Foreign Exchange Commission's USD Put/MXN Call options foreign reserve accumulation mechanism. 3. Includes the net return of the FX reserves' investments.

Furthermore, early this year the International Monetary Fund (IMF) renewed Mexico’s Flexible Credit Line (FCL) that was originally put in place in March 2009, renewed in early 2010, and set to expire on April 2011. The FCL – an IMF credit line that allows countries deemed to have “strong fundamentals” to increase FX reserves – was expanded to US$73 billion from US$48 billion previously.

The IMF decided to increase the maturity of all new FCL arrangements from one year to two years. This also applied to other countries eligible for the FCL and has indeed already been applied to Colombia and Poland. However, we believe this was a clear endorsement of the strength of Mexico’s fundamentals, as the IMF not only renewed the credit line well before its expiration but also enlarged and extended it.

With these additional funds in the central bank’s reserves, Mexico’s ratio of foreign resources to government external debt has improved to 1.8 from 1.4 in January 2010 and from 1.5 in January 2009 (figure).

Figure 58: External debt, reserves, and IMF’s Flexible Credit Line

020406080

100120140160180200

US$ bn

Jan 09 Jan 10 Dec 10

External debtFX reserves

IMF's FCL

Source: Banco de México and Ministry of Finance.

Even though we do not believe the government will make use of the FCL in the short or medium term, we believe that it provides an important precautionary buffer.

Fixing rate: Banco de México provides a reference exchange rate level on a daily basis by conducting several intraday surveys using electronic data of FX operations from the main FX brokerage firms. The fixing exchange rate serves as the official reference rate for US dollar-denominated contracts domiciled in Mexico.

FX forward and futures market: In addition to the OTC market, the market for listed future peso contracts has grown rapidly over the past few years, through the Mexican Market of Derivatives (MexDer), as Siefores (Sociedades de Inversion Especializadas en Fondos para el Retiro; that is, pension funds) have turned more active.

The Central Bank Mexico’s Central Bank opened its doors back in 1925. However, Banco de Mexico did not become an independent institution until 1994. In sync with Banco de México’s autonomy, the monetary authority adopted ‘el corto’ (used to implement monetary policy through a signal based on monetary targeting to absorb liquidity in the interbank money market) as its monetary instrument.

Later on, in 2001, Banco de México officially implemented its inflation target level of 3%. Finally, in early 2005, Banco de México adopted the policy rate target (the O/N rate, or tasa de fondeo) as its main monetary policy instrument; el corto was officially discontinued on January 21, 2008.

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The Central Bank governor is appointed for a six-year term, by the President, and is subject to Senate approval. The current governor, Agustin Carstens, took office in January 2010 and was previously Mexico’s Minister of Finance, Undersecretary of Finance, and Deputy Managing Director of the IMF. Carstens replaced two-term governor, Guillermo Ortiz.

Table 24: Banco de Mexico’s Historical Highlights Sep 1, 1925 Banco de México opens its doors Jun 22, 1992 The New Monetary Law (released on June 22, 1992)

in which the government decided to eliminate three zeroes from the peso, yielding to the creation of the 'New Pesos' (1,000 Pesos = 1 'Nuevo' Peso)

Apr 1, 1994 Banco de México becomes an Independent Central Bank

Sep 13, 1995 Banco de México changed its operational instrument to a monetary target signal, also known as ‘el corto’, in which commercial banks should hold a zero monthly cumulative balance with the Central Bank

1999 'Unofficial' adoption of an inflation target of 3% 2001 Official adoption of an inflation target regime 2002 Official adoption of a long-term inflation target of 3% Jul 28, 2002 'Official' adoption of a long-term inflation target of 3%

+/- 1% Jan 2003 The Central Bank's board started to meet on a

biweekly basis to announce changes in monetary policy (before the board could make announcements every other day). It is worth noting that a statement was released only after the second meeting of the month

Apr 10, 2003 Banco de México modified its operational instrument ‘el corto’ to a daily balance, from a monthly cumulative balance

Apr 2004-May 2005 The board mentioned in its communiqués that short-term interest rates in Mexico 'should reflect' the US Fed's monetary policy actions

Aug 26, 2005 'Unofficial' adoption of the overnight rate as the monetary policy instrument of choice, instead of ‘el corto’

Jan 2006 The Central Bank's board started to meet on a monthly basis to announce changes in monetary policy

Jan 20, 2008 'Official' adoption of the overnight rate as the monetary policy instrument of choice

Feb 4, 2011 The Central Bank published its first monetary policy meeting minutes

Source: Banco de Mexico

A renewed central bank. With the new leadership of Banco de México Governor Carstens and the other members of the board, the Bank has become more transparent and increased the channels of communication with market participants, particularly by releasing minutes from the monetary policy meetings as well as by giving the Vice Governors more active roles.

Table 25: Banco de México Summary Objective Price stability Strategy Inflation targeting Policy instrument name Tasa de interés objetivo Ticker MXONBR Deciding board Governor and four other members Meeting frequency Two per quarter Inflation target 3% (+/-1%)


Table 26: Heads of Banco de México1 Banxico Head Period Mexico President Alberto Mascareño

Sep 1925 - May 1932 Plutarco Elias Calles

Emilio Portes Gil Pascual Ortiz Rubio

Agustín Rodríguez May 1932 - Apr 1935 Pascual Ortiz Rubio

Abelardo L. Rodríguez Lázaro Cárdenas Gonzalo Robles Apr 1935 - Dec 1935 Lázaro Cárdenas Luis Montes de Oca

Dec 1935 - Sep 1940 Lázaro Cárdenas

Eduardo Villaseñor

Sep 1940 - Dec 1946 Manuel Ávila Camacho

Carlos Novoa Dec 1946 - Nov 1952 Miguel Alemán Valdés

Rodrigo Gómez Dec 1952 - Aug 1970 Adolfo Ruiz Cortines

Adolfo López Mateos Ernesto Fernández Hurtado

Dec 1970 - Dec 1976 Gustavo Díaz Ordáz

Luis Echeverría Álvarez Gustavo Romero Kolbeck

Dec 1976 - Mar 1982 José López Portillo

Miguel Mancera Aguayo

Mar 1982 - Sep 1982 José López Portillo

Carlos Tello Macías Sep 1982 - Dec1982 José López Portillo Miguel Mancera Aguayo

Dec 1982 - Dec 1998 Miguel de la Madrid Hurtado

Carlos Salinas de Gortari Ernesto Zedillo Ponce de León Guillermo Ortiz Martinez Jan 1998 - Dec 2009 Ernesto Zedillo Ponce de León Vicente Fox Quesada Felipe Calderón Hinojosa Agustín Guillermo Carstens Jan 2010 - Felipe Calderón Hinojosa Source: Banco de México. 1. From 1925 to 1993 the head of Banco de México was named Director General. However, the Central Bank's head has been called Governor since 1994 when Banco de México achieved autonomy.

Recently, President Calderón appointed Manuel Ramos Francia (Banco de México chief economist) to the board, replacing Guillermo Güemez, whose term ended on December 31, 2010. We highlight the importance of a central bank having a full board in order to enhance the discussions that lead to monetary policy decisions. We believe this is essential to maintaining Banco de México’s historically strong institutional framework.

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Table 27: Banxico's current board members

In office since:

Current Period:

Possibility of Reappointment

Agustin Carstens 2010 2010-2015 Yes José Sidaoui 1997 2005-2012 Yes Roberto Del Cueto 2007 2007-2014 Yes Manuel Sánchez-González 2009 2009-2016 No Manuel Ramos-Francia4 2011 2011-2019 Yes Source: J.P. Morgan with data from Banco de México.

Prices & Wages Early last year Mexico experienced a pickup in inflation on the back of new taxes and higher energy tariffs implemented at the beginning of the year. Note that starting in 2010 the Ministry of Finance introduced a monthly increase in fuel prices, after President Calderon’s committed to freeze administered prices during 2009. However, higher taxes proved to be a one-off shock that explained the inflation hump observed during the first quarter of 2010. Furthermore, the strength of the peso vis-à-vis the US dollar, and a still large negative output gap, helped to keep headline inflation moderate, while core prices have sustained a disinflation trend since 2009 (figure below).

Figure 59: CPI inflation

2

3

4

5

6

7 Headline Core Banxico target%oya

2006 2007 2008 2009 2010 2011


It is worth noting that early this year Banco de México made several revisions to the CPI methodology. In our view, the new CPI reflects a marginal but important shift in the consumption patterns of the average Mexican citizen from “goods” to “services” as the component claiming the greater share of income (the shift has also been confirmed in the latest INEGI survey). “Services” now weighs 51%, while the “goods” component weighs 49% – a reversal of the weighting under the previous methodology (table below).

Table 28: Goods and services weight reversal %

New Previous Difference Headline 100.0 100.0 - - Goods1 48.9 50.7 -1.8 Services 51.1 49.3 1.8 Source: J.P. Morgan with data from Banco de México. 1. Includes gasoline, heating gas, and vehicle lube oil (from the noncore side of inflation).

Taking a look at the breakdown by headline and core components, we believe there are four things worth noting. (1) There has been a 2% switch from the “noncore” to the “core” weight. This is mainly because phone service tariffs have been moved from the “administered and negotiated” subcomponent in the previous system (now renamed “government-regulated tariffs”) to the “other services” subcomponent in the new CPI. (2) Indeed, “other services” experienced the largest relative weight change, now accounting for 18.4% of the basket from 14.7% previously. In addition to the 1%-pt increase in the weight of the “housing” subcomponent, this change has led the “services” component to have a larger weight than the “goods” component. (3) The weight of the “energy” subcomponent in the new CPI is now 9.5%, 1.7%-pt higher than its previous weight of 7.8%. This reflects a 1.3%-pt increase in the weight of electricity tariffs, to 3.6%, and a 0.5%-pt increase in the weight of gasoline prices to 4.2%, while the weight of heating gas has been lowered by 0.1%-pt to 1.7%. (4) “Fresh fruits and vegetables” remain almost unchanged at a weight of 3.7% from 3.3% previously (table). Table 29: Goods and services weight reversal %

New Previous Chg Headline 100.0 100.0 - - Core 76.7 74.8 2.0 Goods 34.5 37.0 -2.5 Processed foods 14.8 14.7 0.1 Other goods 19.7 22.4 -2.6 Services 42.2 32.5 9.7 Housing 18.7 17.9 0.9 Rent 14.3 12.0 2.4 Other housing services 4.4 5.9 -1.5 Other services 18.4 14.7 3.7 Education 5.1 5.2 -0.1 Non-core 23.3 25.2 -2.0 Agriculture 8.5 8.1 0.4 Fresh fruits and vegetables 3.7 3.3 0.4 Metal and egg 4.8 4.8 0.0 Energy and govt. regulated1 14.8 17.2 -2.4 Energy 9.5 7.8 1.7 Electricity 3.6 2.3 1.3 Gasoline2 4.2 3.7 0.5 Heating gas3 1.7 1.8 -0.1 Govt. regulated 5.3 9.4 -4.1

Source: J.P. Morgan with data from Banco de México. 1. Previously known as 'Administered and negotiated'. 2. Includes low and high-octane gasoline. 3. Includes natural and LP domestic heating gas.

33



Impact of new inflation weights, going forward:

(1) There will be a higher degree of seasonality, due to: (a) energy prices, particularly electricity tariffs, which usually make a significant contribution to the seasonality of inflation – an issue that will be exacerbated by the new, larger weight of the “energy” subcomponent; and (b) housing prices, as Banco de México will now calculate housing price inflation using rental prices –anecdotal evidence suggests that landlords tend to modify rental prices once or twice a year, usually in January and July/August.

(2) Volatility in inflation will be lower, for two main reasons. First, as mentioned, instead of using input prices (e.g., cement, copper, iron, etc.) to calculate housing price inflation, Banco de México will now use rental prices. We believe this modification could isolate an important part of the CPI from commodity price swings, especially since rental prices exhibit exceptionally low variance compared to commodity prices. Second, the lower weight of “other services” will potentially reduce the volatility historically associated with airfares and tourism package prices.

(3) The fact that “services” will have a larger weight in the new CPI relative to the “goods” component may establish a downward inflationary bias. Judging by the historical contribution of these two components to headline inflation under the previous methodology, we believe that the new bias in favor of services may signal lower inflation ahead.

(4) Base effects will be beneficial, as 12-month inflation will be calculated using indices computed with different methodologies. Even though this additional effect will only last until the end of this year, we expect benign base effects to compound the downward bias described above, allowing 12-month inflation to fall within Banco de México’s long-term inflation target of 3%+/-1% throughout 2011. As a result, this change could make inflation less responsive to the recent rise in global commodity prices and provides support for our current end-2011 inflation forecast of 3.7%.

In this context, our take is that Mexico will not face strong inflationary pressures in 2011 due to: (1) Base effects coming from two sources. On one hand, because of the above-mentioned higher taxes and administered prices implemented last year and, on the other hand, the new CPI calculation methodology which, in our view, will incorporate a downward bias; (2) Structural effects

that have increased the degree of competition among the retail and airline sectors; and (3) moderate wage negotiations.

Against this backdrop, we expect 12-month inflation to fall within Banco de México’s long-term inflation target of 3% +/-1% throughout 2011. Moreover, we believe recent changes to CPI methodology could help inflation to be less responsive to the recent rise in global commodity prices, which supports our current 3.7% inflation forecast for end-2011 (consensus 3.9%).

On the other hand, the average minimum wage in Mexico for the three different labor areas was settled at MXN58.2 (US$4.9) per day for 2011, up 4.1% from the prior level. Moreover, public and private workers negotiate wage adjustments on a yearly basis. This information is published by the Ministry of Labor on a monthly basis. In our view, wage settlements are an important indicator as Banco de México usually uses wage negotiations to gauge demand-side inflationary pressures that could trigger monetary policy actions.

Table 30: Minimum wage settlements MXN per day

2011 2010 Chg %Chg Area A 59.80 57.46 2.34 4.07 Area B 58.10 55.84 2.26 4.05 Area C 56.75 54.47 2.28 4.19

Average 58.22 55.92 2.29 4.10 Source: National Minimum Wage Committee (CONASAMI).

Finally, it is worth noting that, despite employment conditions that have improved significantly over the last year, wages have remained relatively subdued in real terms. This is consistent with the absence of demand-side inflationary pressure, so far. Moreover, the fact that formal employment has recovered significantly quicker than wages is evidence that the wage mass (consumers’ disposable income) has not reached its pre-crisis level (figure below).

34



Figure 60: Real wage mass in the formal sector

-6-4-202468

2004 2005 2006 2007 2008 2009 2010

%oya, real terms

Wages

Formal employmentWage mass

Source: IMSS (Mexican Institute of Social Service).

Fixed-Income Market Federal government securities (FGS): Federal government securities make up about 60% of Mexico’s local fixed income market, followed by IPAB, the Savings Protection Institute (20%), corporate, state, and municipal debt (18%), and MBS and other securities (3%).

Figure 61: Fixed-income market by issuer

60%20%

8%

10%

3%Government securities

IPAB

Corporate debt

States and municipalities

Mortgage-backed securities


It is worth noting that the federal government debt is highly concentrated in Mbonos, which account for 50% of outstanding debt, followed by Cetes and Udibonos with 18% each, and Bondes D with 14%.

Figure 62: Government debt composition

18%

14%

18%

50%

Zero coupon bonds (Cetes)

Floating-rate bonds (Bondes)

Inflation-linked bonds (Udibonos)

Fixed-rate bonds (Mbonos)


Cetes: Short-term (up to 1 year) zero-coupon bonds auctioned every week. These bonds are Euroclearable, and most foreigners are exempt from withholding taxes by the Mexican Finance Ministry.

Mbonos: Medium- and long-term fixed-rate Mbonos are also Euroclearable, and most foreigners are exempt from withholding taxes by the Mexican Ministry of Finance. Average daily turnover reaches over US$1.5 billion. We highlight that back in October 2010, Mbonos were included in Citigroup’s WGBI (World Government Bond Index). Mexico was the first Latin American country to be included in the WGBI. This, in addition to the strong capital inflows to EM observed throughout last year, has made foreign investors the major holders of Mbonos, with around 28% of total outstanding.

Figure 63: Mbonos holdings by type of investor

0100200300400500600700800

Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11Banks Pension FundsMutual Funds ForeignersInsurance companies

MXN


Recently the Mexican government has been able to increase debt duration. Moreover, the local debt yield curve has expanded from 1-year maturity in 1995 to a 30-year tenor in March 2006.

35



Figure 64: Extension of the yield curve

05

101520253035

1m 3m 6m 1y 3y 5y 7y 10y 20y 30yJan 1999 Jan 2000 May 2000 Jul 2001Oct 2003 Nov 2006 Apr 2011

%


Bondes D: These floating-rate bonds were issued in August 2006 to cancel out the Central Bank’s BREMS and acquire USD used to prepay external debt. There is practically no secondary market for these bonds.

Udibonos: These are linkers denominated in inflation-indexed units called UDIs but paid in MXN. The UDI (Unidad de Inversion) is a nontraded monetary unit used to translate the price, interest payment, and principal of UDI-denominated securities (or swaps) into pesos, and is a function of the biweekly CPI. Despite liquidity in Udibonos increasing considerably over the last year, they are still less liquid compared to Mbonos and Cetes, but are the real-rate benchmarks for corporate issuance. The UDI is published on Banco de México’s website (www.Banco de México.org.mx) with the release of biweekly inflation (normally the 10th and 25th day of each month).

The formula to calculate the value of the UDI is:

UDIt = UDIt-1 *[(1+p)(1/n)]

Where:

p = most recent biweekly inflation data at time t. Inflation for the second half of each month (days 16 to 30 or 31) is published by day 10 of the following month; inflation for the first half of each month (days 1 to 15) is published by day 25 of that month; and

n = number of days between the release of biweekly inflation data (from days 11 to 25 by day 10 of each month, and from day 26 to 10 of the following month by day 25 of each month).

External Accounts Mexico’s current account deficit is expected to widen throughout 2011. However, it remains well financed by FDI and portfolio flows. Whilst FDI flows have not reached pre-crisis levels, they are expected to post US$21bn in 2011, nearly double the estimated current account deficit.

Table 31: Balance of Payments and components US$ billion

CA balance FDI (US$ billion) (US$ billion) 2010 2011E 2012E 2010 2011E 2012E Latin America -49.9 -87.9 -129.5 78.8 96.0 109.0 Argentina 3.6 -3.4 -14.6 3.0 2.0 4.0 Brazil -48.9 -69.1 -91.2 32.0 40.0 45.0 Chile -2.1 -8.5 -15.0 11.0 15.0 15.0 Colombia -8.4 -10.2 -11.6 9.0 11.0 11.0 Ecuador -0.4 0.6 1.3 0.5 0.5 0.5 Mexico -5.7 -11.0 -18.0 17.7 21.0 23.0 Peru -2.4 -5.4 -7.2 7.0 6.0 7.5 Venezuela1 14.4 22.8 29.1 -1.4 1.5 4.0

Source: J.P. Morgan estimates. 1. Forecast is based on the series reported by the CB of Venezuela which may overstate Venezuela's oil exports given uncertainty regarding PDVSA export volumes.

While the current account deficit narrowed on the back of an externally driven rebound last year, a robust capital account surplus translated into massive reserve accumulation.

Table 32: Balance of Payments and components US$ billion

2006 2007 2008 2009 2010 Current account -4.8 -9.0 -16.3 -6.3 -5.7 % of GDP -0.5 -0.9 -1.5 -0.7 -0.5 Net exports -6.1 -10.1 -17.3 -4.6 -3.1 Net factorial services -18.9 -19.0 -17.2 -14.8 -14.5 Net non-factorial services -5.7 -6.3 -7.4 -8.4 -9.6 Net transfers 25.9 26.4 25.5 21.5 21.5 Capital account -2.0 22.1 27.2 18.9 36.0 Total liabilities (a+b) 15.9 52.1 36.3 36.8 67.1 FDI 20.4 29.7 25.9 15.2 17.7 Foreigners portfolio 0.1 13.3 4.8 15.2 37.1 Equity holdings 2.8 -0.5 -3.5 4.2 0.6 Fixed income -2.7 13.8 8.3 11.0 36.5 Local currency 2.5 7.8 6.0 3.5 23.1 Foreign currency -5.2 6.0 2.4 7.6 13.4 Assets -17.9 -30.0 -9.1 -18.0 -31.1 Errors and omissions 5.8 -2.8 -3.5 -7.2 -7.6 Change in reserves -1.0 10.3 7.5 5.4 22.8


36



On the other hand, portfolio flows reached an historical high of US$37.1bn in 2010, from US$15.2bn in 2009, mainly explained by the solid US$36.5bn inflows into fixed-income markets, of which US$23.1bn flowed to local bond markets and US$13.4bn took the form of foreign currency-denominated bonds. On the other hand, capital flows to the equity market posted just US$641m in 2010, after reaching US$4.2bn the year before (figure below).

Figure 65: Net foreign investment portfolio flows

-6

-1

4

9

14

19

24

29

2005 2006 2007 2008 2009 2010

US$, billion

Equity market

Local bond market Global bond market


Since the implementation of NAFTA in 1994, Mexico has significantly expanded its free trade agreements with the rest of the world, including the EU in 2000, and Japan in 2005. In fact, Mexico signed a trade agreement with Peru this month.

Table 33: Mexico’s Signed Free Trade Agreements

Agreement Partners: Official Start

Date: 1 NAFTA US and Canada 1-Jan-94 2 TLC - G3 Colombia* 1-Jan-95 3 TLC - Mexico-Costa Rica Costa Rica 1-Jan-95 4 TLC - Mexico-Bolivia Bolivia 1-Jan-95 5 TLC - Mexico-Nicaragua Nicaragua 1-Jul-98 6 TLC - Mexico-Chile Chile 1-Aug-99 7 EUFTA European Union 1-Jul-00 8 FTA - Mexico - Israel Israel 1-Jul-00 9 TLC - Triángulo del Norte El Salvador, Guatemala,

Honduras** 15-Mar-01

10 FTA - European Free Trade Association

Iceland, Norway, Liechtenstein, and Switzerland

1-Jul-01

11 TLC - Mexico-Uruguay Uruguay 15-Jul-04 12 FTA - Mexico-Japan Japan 1-Apr-05 13 TLC - Mexico-Peru Peru 6-Apr-11

Source: Ministry of Economics. *Venezuela was part of the agreement from January 2005 to November 2006. **Free trade agreement with Honduras started on June 1st, 2001.

Domestic Demand Consumption The Mexican consumer was significantly affected by the global financial crisis of 2008/2009, with the double-digit fall in real private consumption only comparable to the aftermath of the 1994-1995 ‘tequila’ crisis. However, we started to see a steady recovery in real private consumption growth rates in 2010. Interesting to note that when the real private consumption growth rate has bottomed in a crisis historically, it took around 2-3 years to retrace historical high levels and 1 year or less to reach pre-crisis growth rates.

Figure 66: Real private consumption %oya

-14%-12%-10%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

1Q811Q821Q831Q841Q851Q861Q871Q881Q891Q901Q911Q921Q931Q941Q951Q961Q971Q981Q991Q001Q011Q021Q031Q041Q051Q061Q071Q081Q091Q10

Real private consumption growth yoy, saar Mean + 1 Stdev - 1 Stdev

Source: INEGI and J.P. Morgan.

Private consumption as a percentage of total consumption, for 2010, was 86%. Private consumption reached 69% of GDP in 2010, coming from a recent low of near 62% during the 1994-1995 ‘tequila’ crisis. Real government consumption is around 11% of Mexican GDP.

Figure 67: Private consumption share as a % of GDP, sa

60

62

64

66

68

70

72

1990 1992 1995 1997 2000 2002 2005 2007 2010

Source: INEGI.

37



Average income per employee has been very stable for the past decade, after recovering from the ‘tequila’ crisis.

Figure 68: Real average income index per employee, sa

60

70

80

90

100

110

120

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Source: INEGI.

Consumer confidence has been gloomy since April 2008 and did not hit its lowest level until October 2009 (index level 77.0), a 27% decline since the end of 2007. Since October 2009, confidence levels have gradually improved (12% as of January 2011).

Figure 69: Consumer confidence index

60

70

80

90

100

110

120

130

Apr-01Oct-01Apr-02Oct-02Apr-03Oct-03Apr-04Oct-04Apr-05Oct-05Apr-06Oct-06Apr-07Oct-07Apr-08Oct-08Apr-09Oct-09Apr-10Oct-10

Source: INEGI.

We believe that consumer credit is likely to gain momentum throughout the year. Note that after having observed a credit card boom in Mexico back in years 2003-06, non-performing loans increased significantly, making banks rethink their credit-giving policies before the global financial crisis (chart below).

Figure 70: Credit card cycle

2

4

6

8

10

12

14

16

-36

-18

0

18

36

54

72

2003 2004 2005 2006 2007 2008 2009 2010 2011

%oya, real terms % of total credit

Delinquency rate

Credit card


More so, the abovementioned downward stage of the credit cycle was exacerbated by the 2008-09 financial turmoil. Nevertheless, commercial banks have now "cleaned up" their credit balances, credit card interest rates have moderated, and employment conditions have improved significantly (chart below).

Figure 71: Credit cards’ cost and formal employment

-6

-4

-2

0

2

4

6

20

25

30

35

40

45

2004 2005 2006 2007 2008 2009 2010 2011

%p.a. % oya

Employment

Credit card interest rate


Even though family remittances represent less than 2% of GDP, they are an important source of income for lower-income families. Remittances were flat last year, with an annual inflow of US$21.3bn, similar to 2009’s US$21.2bn. However, this number is still well below the US$25.1bn in remittances recorded in 2008. As a result, we believe it is highly likely that 2011 remittances will not exceed the 2008 level, although they may be higher than the US$21bn average recorded over the past two years (figure below).

38



Figure 72: Family remittances

9.8

15.118.3

21.725.6 26.0 25.1

21.2 21.3

0

5

10

15

20

25

30

2002 2003 2004 2005 2006 2007 2008 2009 2010

US$, bn


Remittances are especially important for the poorest. According to Consulta Mitofsky, 51.2% of remittances go to basic needs such as food and rent, 10.9% to paying debts, and 5.3% to other items related to consumption. Just 32.6% is allocated to investing; and from that, 20% to buying land or agricultural tools, 5.3% to buying houses, 4.6% to starting businesses, and 2.7% to financing education.

Table 34: Consumer spending breakdown (% total consumption) Items %

Food, Beverages and Tobacco 33.6% Transportation expenses 18.4% Education and entertainment 13.5% Housing expenses, electricity and gas 10.0% Personal care and accessories 7.0% Cleaning products and furniture 6.0% Clothes 5.3% Health care 3.1% Transfers 3.1% Source: INEGI and J.P. Morgan estimates.

Consumption is highly concentrated. If we analyze the spending allocation in Mexico among quintiles, we see that 44% is consumed by the top 20% and 65% by the top 40%. The bottom 40% only accounts for 19% of total consumption.

Figure 73: Total spending by quintile

7%

12%

16%

21%

44%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

I II III IV V

Source: INEGI, 2008 survey.

Investment Mexico gross fixed investment/GDP is around 21%, in line with the global average (21.8%) and above developed markets (EU average 21.1%, US 14.3%). However, it is only midtable amongst other major EM economies.

Figure 74: Comparative Investment Spending Gross Fixed Investment/GDP 2009

0 20 40 60

GuatemalaDominican Republic

ParaguayBrazil

BoliviaUruguay

ChileHondurasCosta Rica

Latin America & CaribbeanArgentina

MexicoPeru

ColombiaSpain

Venezuela, RBPanama

Korea, Rep.Ecuador

IndiaChina

Source: World Bank.

Investment fell to a ‘tequila’ crisis low of ~14%/GDP but has steadily recovered since then to the current 21% level and did not see anything like the collapse during the last recession that it did during the ‘tequila’ crisis or at the beginning of last decade.

39



Figure 75: Real gross fixed capital formation as a % of GDP

12%

14%

16%

18%

20%

22%

24%

26%

1Q80

1Q82

1Q84

1Q86

1Q88

1Q90

1Q92

1Q94

1Q96

1Q98

1Q00

1Q02

1Q04

1Q06

1Q08

1Q10

Source: INEGI.

In 2010 fixed investment expanded 2.3% after plunging 11.3% in 2009. This compares to the 19% and 38% falls seen in the 1982 and 1994/5 crises, respectively. We can see that in 2008/09 gross fixed capital formation did not decrease as much as real private consumption.

Figure 76: Real gross fixed capital formation, % change yoy

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1Q811Q821Q831Q841Q851Q861Q871Q881Q891Q901Q911Q921Q931Q941Q951Q961Q971Q981Q991Q001Q011Q021Q031Q041Q051Q061Q071Q081Q091Q10

Real gross fixed capital formation, sa, change yoy Mean + Std Dev - Std Dev Source: INEGI and J.P. Morgan.

In our view, with the large-scale crisis the Mexican economy experienced back in 2009, firms were left with excess capacity during the first stage of the recovery cycle (figure below). However, we believe that growth, driven mainly by external demand at an early stage, and now boosted by the gradual rebound in domestic demand, is creating incentives for companies to enhance their productive capabilities and therefore to invest.

Figure 77: Capacity utilization in manufacturing

75.7

71.5

-20-15-10-5051015202530

64

66

68

70

72

74

76

78

1998 1999 2001 2003 2005 2007 2009 2010

Capacity utilization Fixed investment (RHS)

% %oya


In this context, we expect gross fixed investment (GFI) to continue surging throughout the year, as several investment projects – particularly in the auto industry ¬ continue to provide a more promising scenario going forward. Furthermore, we expect several infrastructure projects that have remained in a feasibility study phase over the past two years to begin construction in 1H11.

Table 35: Government-sponsored infrastructure projects1 Investment, US$ mn Project description Total Government Private Total 25,786 15,206 10,580 Crude oil and gas 13,778 13,778 - - Gas pipelines 660 660 - - Refining 10,740 10,740 - - Crude oil production 2,378 2,378 - - Tourism 9,653 764 8,889 Transportation and telecom 1,550 139 1,411 Roads and highways 1,270 139 1,131 Seaports and airports 280 - - 280 Electricity generation 777 514 263 Water 28 11 17

Source: J.P. Morgan with data from Banobras (state-owned development bank). 1. Includes ongoing works and those projected to start in year 2011.

Exports As a percentage of GDP, exports have risen from 15% in 1993, just before the implementation of NAFTA, to an average of 30% of GDP in the past five years. As a share of total exports, manufactured goods exports have risen from an average of 37% of total in the 1980s to over 81% in the past five years. However, despite Mexico’s extensive network of free trade agreements (FTAs;

40



covering 80% of the world economy), over 80% of export sales are still made in the US.

Mexico’s economy is reasonably ‘open’, with exports/GDP of near 30% second only to Chile (35%) amongst the major LatAm economies and well above the region’s most closed major economy, Brazil (9%).

Table 36: Exports profile % of total exports

Exports to:

Total

Exports (% GDP)

Commodity Exports US EU China

Argentina 18.7 59.7 6.8 16.5 9.0

Brazil 8.7 55.4 10.6 23.7 16.9

Chile 35.1 74.8 9.7 17.7 24.4

Colombia 14.2 56.9 42.5 12.5 4.9

Ecuador 31.0 80.9 34.8 12.9 1.9

Mexico 30.0 20.9 80.0 5.3 1.4

Peru 23.1 77.7 19.9 21.2 12.1

Venezuela 28.6 99.9 49.4 7.9 9.8

Latin America1 20.7 47.8 42.3 13.9 9.3


Mexico’s major exports are electrical goods (38%), cars/auto parts (17%), and oil (12%). Together they account for 67% of total exports.

Table 37: Mexican exports breakdown Category US$ mn % of Total

Electric machinery and other industries machinery 113,106 37.9% Transport equipments, road vehicles 52,963 17.8% Auto/Autoparts 51,739 17.3% Mining 43,535 14.6% Crude Oil 35,907 12.0% Iron, steel and manufactures of those metals 13,740 4.6% Medical machinery 10,337 3.5% Pearls, precious and semiprecious stones 9,215 3.1% Chemicals and related products 8,880 3.0% Beverages, alcohol and tobacco 8,092 2.7% Vegetables, fruits, cereals, coffee and others 7,744 2.6% Miscellaneous manufactured articles 7,359 2.5% Plastics 7,366 2.5% Textiles, footwear, umbrellas and others 6,725 2.3% Stones and related manufactures 2,864 1.0% Paper, paper pulp and others 1,960 0.7% Live animals and related products 2,037 0.7% Non-classified articles 1,490 0.5% Leather and other manufactures 480 0.2% Cork and wood manufactures 300 0.1% Animal and vegetable oil and fats 134 0.0% Arms and ammunition 25 0.0% Works of art, collectors' pieces and antiques 9 0.0% Total exports 298,361 100.0%

Source: INEGI. Data for 2010.

These exports are predominantly focused on the US market, the destination for approximately 80% of them. However, this percentage has been declining from the recent 2001 peak of 89%, as Mexico has gradually diversified its export destinations – particularly to Europe and Latin America. As seen in the figure below, this means that exports to the US account for around 22% of Mexican GDP.

Figure 78: Mexico Exports to the US as % of Total 12 month rolling average

77%78%79%80%81%82%83%84%85%86%87%88%89%90%

Jan-93Oct-93Jul-94Apr-95Jan-96Oct-96Jul-97Apr-98Jan-99Oct-99Jul-00Apr-01Jan-02Oct-02Jul-03Apr-04Jan-05Oct-05Jul-06Apr-07Jan-08Oct-08Jul-09Apr-10

Mex exports to US share Mean + Std Dev - Std Dev

Source: INEGI.

The remaining 20% of Mexico’s exports are well diversified between South and Central America (7%), Europe (5%), and Asia (4%).

Figure 79: Mexican Exports by Region

US, 80%

Europe, 5%

South America, 5%

Canada, 4% Asia, 4%Central

America, 2%


41



Imports Mexican imports have risen dramatically since 1994, when the NAFTA was implemented. Mexico is one of the countries in the world with the most free trade agreements signed (13) with more than 44 countries; although it’s undeniable that commercial activity has been most active with the US, for obvious reasons.

Last year, Mexico imported mostly electrical machinery, 39% of total imports, followed by chemicals, 7.8%, and iron and steel manufactures, 8.3%.

Table 38: Mexican imports breakdown Category US$ mn % Total

Electric machinery and other industries machinery 117,656 39.0% Chemicals and related products 23,606 7.8% Transport equipments, road vehicles 25,406 8.4% Iron, steel and manufactures of those metals 24,998 8.3% Mining 25,262 8.4% Fuels 24,058 8.0% Plastics 21,823 7.2% Medical machinery 10,554 3.5% Vegetables, fruits, cereals, coffee and others 8,110 2.7% Textiles, footwear, umbrellas and others 8,865 2.9% Paper, paper pulp and others 6,612 2.2% Beverages, alcohol and tobacco 5,701 1.9% Miscellaneous manufactured articles 5,033 1.7% Non-classified articles 5,777 1.9% Live animals and related products 5,208 1.7% Stones and related manufactures 2,090 0.7% Animal and vegetable oil and fats 1,283 0.4% Cork and wood manufactures 1,206 0.4% Pearls, precious and semiprecious stones 1,076 0.4% Leather manufactures 1,124 0.4% Arms and ammunition 81 0.0% Works of art, collectors' pieces and antiques 9 0.0% Total exports 301,482 100.0% Source: INEGI and J.P. Morgan. Data for 2010.

Figure 80: US and China imports share as a % of total imports

40%

45%

50%

55%

60%

65%

70%

75%

80%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

China US (RHS) Source: J.P. Morgan.

Mexican imports come mainly from the US, representing 48% of total imports. Europe made up 13% of total imports for the same period, as opposed to only 5% of exports. Imports from China are increasing at a fast pace; between 1993 and 2000, Chinese import share was less than 2%. However, Chinese imports represented 15% of total imports in 2010, up from 13.8% in 2009.

Figure 81: Mexican imports by region

US, 50%

Asia, 33%

Europe, 12%

South America, 3%

Central America, 1% Oceania, 0%

Africa, 0%


Sectors Telecom The first Mexican telephone ‘call’ was made in March 1878, and private companies such as Bell (La Mexicana) and Ericsson (Mexeric) operated fixed-line telephony concessions. These two companies merged in 1948 to form Telmex. The government bought 51% of Telmex in 1972 and privatized the company in 1995.

Currently Mexico is midtable in Latin America fixed-line telephony penetration, behind Chile, Argentina, and Brazil but ahead of Colombia and Peru.

42



Figure 82: Main telephone lines per 100 hab, as of 2010 32.6

28.4

24.2 24.0 23.521.4 21.1

17.8 17.7 16.4 15.6 14.711.1 10.2 10.1 9.6 8.2

6.14.4

0

5

10

15

20

25

30

35

Costa Rica

Uruguay

Argentina

Venezuela

Trinidad and Tobago

Brazil

Chile

El Salvador

Mexico

Colombia

Panama

Ecuador

Honduras

Peru

Guatemala

Dom Republic

Bolivia

Paraguay

Nicaragua

Source: World Economic Forum and J.P. Morgan.

Mexico has 19.6 million fixed lines (14m residential and 5.6m nonresidential), of which Telmex has 80% (15.5m as of 4Q10). The remaining 20% of the market includes Axtel, Maxcom, Televisa, and Megacable.

Figure 83: Residential and Nonresidential lines’ growth rate

-10%-8%-6%-4%-2%0%2%4%6%8%

10%12%14%16%18%20%22%24%26%

Dec-9

5Se

p-96

Jun-

97Ma

r-98

Dec-9

8Se

p-99

Jun-

00Ma

r-01

Dec-0

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03Ma

r-04

Dec-0

4Se

p-05

Jun-

06Ma

r-07

Dec-0

7Se

p-08

Jun-

09Ma

r-10

Residential fixed lines % Change YoY Non-Residential fixed lines % Change YoY Source: COFETEL and J.P. Morgan.

In mobile telephony, America Movil (ticker: AMX) was created in September 2000 as the result of a spin-off from Telmex. At that time AMX only had operations in Mexico, Guatemala, Ecuador, and the US, and only had 10.1m subscribers compared to 225 million today (4Q10).

Total Mexican mobile subscribers reached 91.3 million (December 2010), of which AMX had 64 million (70%). This is followed by Telefonica with 20.2 million (22%) and the others have 7.1m (8%). Mexico is ranked 93rd out of 139 countries globally by mobile penetration, behind Argentina (25th), Spain (43rd), Colombia (74th), Chile (64th) and Brazil (76th).

Figure 84: Minutes per Subscriber

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

20

40

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Jan-95Nov-95Sep-96Jul-97May-98Mar-99Ene-00 Nov-00Sep-01Jul-02May-03Mar-04Jan-05Nov-05Sep-06Jul-07May-08Mar-09Jan-10Nov-10

Minutes per user Minutes per user Growth yoy Source: COFETEL and J.P. Morgan.

Pay TV has also been growing fast. Since 2000, the subscriber CAGRs for satellite and cable have been 21% and 9% respectively. Televisa and Megacable are the major players in this industry, though new entrant Dish, from MVS, is gaining importance and expects to reach 6m by 2014 from its current 2.2m subscribers.

Figure 85: Cable and Satellite TV Subscriber growth rate

-10%0%

10%20%30%40%50%60%70%80%90%

100%110%

Mar-01

Dec-01

Sep-02

Jun-03

Mar-04

Dec-04

Sep-05

Jun-06

Mar-07

Dec-07

Sep-08

Jun-09

Mar-10

Dec-10

Cable TV Satelite TV

Source: COFETEL.

43



Figure 86: Cable and Satellite TV Subscribers, in thousands

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,000

Mar-00

Dec-00

Sep-01

Jun-02

Mar-03

Dec-03

Sep-04

Jun-05

Mar-06

Dec-06

Sep-07

Jun-08

Mar-09

Dec-09

Sep-10

Cable TV Satelite TV Source: COFETEL.

Mexico is ranked 85th out of 139 countries in internet users per 100 of population, with 25.9 users, behind Brazil with 38.7 users (ranked 57th), Chile with 34.0 users (ranked 63rd) and Peru with 27.7 (ranked 81st). Mexico has around 35m internet users but just 17m have internet access in the house. The CAGR of total users since 2000 is 21%. Currently, 96% of all internet accounts are with broadband technology, whilst three years ago this share was only 64%.

Figure 87: Internet users in millions

5 7

11 12 14

18 21

22 23

28

35

3 3 4 5 5 6 7 8 9

13

17

-

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Total Users Users with internet access in his house

Source: COFETEL.

Figure 88: Number and type of internet accounts per 100 inhab

1.0 1.8 1.8 1.9 2.0 1.9 1.6 1.2 0.6 0.40.1

0.1 0.2 0.4 1.0 1.8 2.9 4.37.1

9.2

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Dial Up Broad Band

Source: COFETEL.

Housing As of the 2005 census there were an estimated 24.3 million houses in Mexico. 2025 estimates are that this needs to grow to 35.7 million. This growth is driven by demographics and lower average occupancy. In 2005 there were 4.0 occupants per household, down from 5.0 in 1990. For 2025 it is estimated to decline to 3.3 occupants per house. Mexican Government Housing authorities estimate a housing deficit today of around 8.9m homes from 9.5m in 2004 – people that want a house but do not have one; or do not have an adequate house (very poor condition). Additionally, it is estimated that 633,000 households are formed every year – of which 60% are estimated able to demand a mortgage loan.

73% of households have three or more rooms (a kitchen is considered a room), with 18% having two rooms and 8% one room. Approximately 90% have cement or wood floors, whilst 10% have only a dirt floor.

Table 39: Housing Outlook

1970 1990 1995 2000 2005 2010 2015

Number of houses 8.3 16.2 19.4 21.9 24.3 27.2 30.2 Average number of occupants per house 5.8 5.0 4.7 4.4 4.3 3.9 3.7 Source: INEGI and CONAPO.

44



Mexico City and the State of Mexico make up the majority of the households. As of 2010 these two entities were estimated to account for 22.5% of total. The second-highest region, on the same basis, is northern Mexico, with 19.3% of total houses. This region includes Aguascalientes, Coahuila, Chihuahua, Durango, Nuevo Leon, San Luis Potosi, Tamaulipas, and Zacatecas.

Figure 89: Household geographic distribution for 2011e

Center, 38%

North, 19%

North Pacific, 16%

South Pacific, 14%

South East and Caribbean,

13%

Source: CONAPO and J.P. Morgan.

In the past 10 years many changes were made in order to develop financing channels for the housing sector. Government participation via institutions such as Infonavit played a key role in developing this market.

Infonavit is an autonomous institution that provides entry-level mortgages to lower-income families; this is among the biggest mortgage institutions in the Americas (in terms of loans originated). As of 2010 Infonavit had 8.1m affiliates out of the 32m people who work in the formal sector. 90% of Infonavit resources come from mandatory employer contributions (40%). These amount to 5% of the monthly salary of private workers and are contributed to the workers’ Infonavit accounts. The remaining financing largely comes from mortgage repayments (50%).

Figure 90: Mortgage market share by institution

Infonavit, 66%

Fovissste, 13%

Financial Entities,

17%

Others, 4%

Source: HOMEX.

Figure 91: Infonavit mortgages granted by year, in ’000

251199

257298 306

376422

459494

447475 480

-

100

200

300

400

500

600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

Source: INFONAVIT.

The strategy of the federal government and Infonavit is to focus on covering the workers that earn less than 4x the minimum wage. For 2012 the goal is to reach 600,000 annual mortgages, 65% of them focused on workers who earn less than 4x the minimum wage. However, currently workers who earn from 2x minimum wages to 4x make up 34.6% of the affiliates. For 2013 the goal is to increase this share to 39%. The second major source of mortgage provisions is banks. Bank credit to the housing sector tripled from 2001 to 2005.

45



Figure 92: Credit to housing sector by banks (MXN bn)

-60%-40%-20%0%20%40%60%80%100%120%

050

100150200250300350400

Dec-

94No

v-95

Oct

-96

Sep-

97Au

g-98

Jul-9

9Ju

n-00

Ma y

-01

A pr-

02M

ar-0

3Fe

b-04

Jan-

05De

c-05

Nov-

06O

ct-0

7Se

p-08

Aug-

09Ju

l-10

Total Housing Housing loans growth rate, yoy

Source: Banxico.

As of 2010 Infonavit registered 1,417 homebuilders, 80% of the 2007 level given the impact of the economic crisis. The concentration of this sector among the big housing companies (building more than 3,000 homes each year) increased from 67% in 2007 to 75% in 2010.

Figure 93: Number of homebuilders

1,049 934

1,156

1,762

1,364

1,159

1,417

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2004 2005 2006 2007 2008 2009 2010

Source: INFONAVIT.

The biggest public listed homebuilders in Mexico are Homex and Geo, which had market shares of 8.5% each in 2010. Urbi is at 6.3% and Ara at 3.4%.

Finally, it is worth noting that, in contrast to many other countries’, the Mexican housing market has not experienced an asset price bubble. All housing segments – from social housing to ‘residential plus’ premium housing – have seen fairly moderate price cycles.

Figure 94: Price per Sq. Mt. by Segment

4,0006,0008,000

10,00012,00014,00016,00018,00020,00022,00024,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average Social Economic

Middle Residential Residential Plus

Source: SHF on Real Estate Watch.

Energy Oil accounts for about 5-6% of GDP, 10-15% of exports, and 30-40% of fiscal revenues. The sector is dominated by state-owned Pemex, which is responsible for production, distribution, and imports of oil and gas products. The central bank buys all foreign exchange from Pemex and limits the currency inflow to the economy to reduce pressures on the exchange rate from oil revenues.

Pemex is the world’s third-largest oil company, by crude production, and the sole producer of oil, gas, and petroleum products in Mexico. In 2010 the company produced 2.5mmbd (Petrobras 2.0mm) of oil and had total production of 2.9 mmboed (Petrobras 2.6 mm). The company believes it has touched bottom in terms of production (2.5m bbl/d) and looks for a gradual recovery to 2.65-75m by end 2012 and 3.0m by 2017/8. They are targeting 100% 1P reserve replacement in 2012. Table 40: Pemex Production Highlights In thousands barrels daily

2009 2010 % Change yoy Liquid Hydrocarbons 2,971 2,953 -0.6% Crude Oil 2,601 2,576 -1.0% Natural Gas 370 377 1.9% Source: Pemex.

46



Table 41: Pemex Operating Summary Exploration and Production 2006 2007 2008 2009

Production and international trade Oil and gas production (MMboed) 4.43 4.39 3.93 3.78 Crude oil production (MMbd) 3.26 3.08 2.79 2.60

Change -2.3% -5.5% -9.2% -6.8% Natural gas production (MMMcfd) 5.36 6.06 6.92 7.03

Change 11.2% 13.1% 14.2% 1.6% Crude oil exports (MMbd) 1.79 1.69 1.40 1.23

Change -1.3% -5.9% -16.8% -12.0% Reserves

Liquids and gas 1P reserves (MMMboe) 15.51 14.72 14.31 13.99 Change -5.8% -5.1% -2.8% -2.2% 1P developed reserves (MMMb) 10.65 10.01 10.20 9.60 Crude oil 1P reserves (MMMb) 11.05 10.50 10.40 10.02

Liquids and gas 2P reserves (MMMboe) 30.77 29.86 28.83 28.23 Liquids and gas 3P reserves (MMMboe) 45.38 44.48 43.56 43.08 Average 1P reserve life (years) 9.6 9.2 9.9 10.2 Average 2P reserve life (years) 19.0 18.7 19.9 20.5

Exploration Reserve replacement rate 1P (2) 41.0% 50.3% 71.8% 77% Discoveries 3P (MMboe) 966 1,053 1,482 1,774 Reserve replacement rate 3P (3) 59.7% 65.8% 102.4% 128.5%

Refining 2006 2007 2008 2009 Capacity (Mbd) 1,540 1,540 1,540 1,540 Throughput (Mbd) 1,284 1,270 1,261 1,295 Production of petroleum products (Mbd) 1,546 1,511 1,490 1,524

Change -0.5% -2.3% -1.4% 2.3% Domestic sales of petroleum products (Mbd) 1,457 1,516 1,827 1,772 Domestic sales of gasoline (Mbd) 718 760 792 792

Imports / Domestic sales of gasoline 28.0% 39.0% 41.8% 38.6% Gas and Basic Petrochemicals 2006 2007 2008 2009 Dry gas production (MMcfd) 3,445 3,546 3,461 3,572 Natural gas domestic sales (MMcfd) 2,955 3,076 3,086 3,119 Net imports of natural gas (MMcfd) (4) 451 386 447 422 Liquids of gas production (Mbd) 436 405 365 370 Petrochemicals domestic sales (Mt) (5) 2,332 3,888 4,134 4,014 Petrochemicals imports (Mt) 436 425 440 568 Source: Pemex.

Production declines have been focused on the Cantarell field, whilst the short-term development focus is on the Chicontepec field, where current production is only around 30 Mbd, but a 2009-2017 average of 200-400 Mbd is forecast. Longer term, deepwater offshore fields are being explored, such as Tamil-1, an extra-heavy oil reservoir, and Lakach, a large gas field with an estimated total reserve of 1.4 Tcf.

Total Pemex investment is forecast to be around $22.2bn in 2011, up from $20.8bn in 2010, and $18.6bn in 2009, with 85% focused on exploration and production (E+P). Cantarell went from a peak 63% of total production at peak, to only 22% today. The company believes Cantarell’s current 550k bpd is sustainable for the next 3 years. Ex-Cantarell, Mexico has seen a 9.2% five-year production growth CAGR, one of the highest in the world, and vs only 3.8% in Brazil. Pemex revenues were $110bn in 2010, and EBITDA was $67bn. The difference between actual earnings and the $3.9bn reported accounting loss is made up of the $2bn LPG residential subsidy, $2.3bn gasoline and diesel subsidies, and $5.1bn taxes to the government.

Mexico has three oil stabilization funds – for the federal government, for Pemex, and for the states. 40% of ‘excess revenues’ are allocated to the federal fund, and 25% each to the Pemex and state funds. There is a target level of savings (relatively low at around 1.2% of GDP), and amounts above these levels are allocated to investment (75%) and to supporting pension fund restructuring (25%).

Table 42: Oil-Related Fiscal Indicators % of GDP

2008 2009 2010 2011e 2012e Budget Balance -0.1 -2.3 -2.8 -2.6 -2.1 Budgetary revenue, by type 23.6 23.8 22.5 22.3 22.3 Oil revenue 8.7 7.9 7.3 7.4 7.0 Non-oil tax revenue 10.0 9.5 10.5 10.6 11.1 Non-oil non-tax revenue 4.9 6.4 4.7 4.2 4.2 Oil revenue 8.7 7.9 7.3 7.4 7.0 Pemex Revenues 3.0 3.2 4.3 4.3 4.3 Other Oil Revenues 5.7 4.7 3.0 3.1 2.7 Excise tax revenues (incl. fuel) -1.4 0.4 0.1 0.3 0.3 Budgetary expenditure 23.7 26.1 25.3 24.9 24.4 Non-oil augmented balance -7.5 -9.8 -7.9 -7.6 6.4 Source: IMF.

Mexico also has energy subsidies and a mechanism to smooth gasoline price volatility. The government has been attempting to moderately increase gasoline prices in order to reduce this subsidy. At the same time there is a straight subsidy on household-used LP gas and electricity. These three subsidies cost the budget around 1.4% of GDP in 2009.

Figure 95: Gasoline Prices Ps per liter

4.04.55.05.56.06.57.07.58.08.59.09.5

10.0

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

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04Ju

l-04

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11

Source: INEGI.

47



The 2008 energy reform allowed for improved decision making, with a stronger CEO and a board of directors with clear roles and responsibilities. An executive committee was created and four new professional board members incorporated. The company’s execution and financial capability were also strengthened with a new contracting regime (contracts with performance incentives, prices can be negotiated, and participants prequalified), flexibility to invest excess income, a differentiated fiscal regime, and the ability to issue citizens’ bonds.Pemex is looking to issue three sets of performance contracts this year (data room open since November, award expected in May) for mature southern fields. Then hopes to roll out in mature northern fields and Chicontepec. Table 43: Energy Subsidies in Mexico % of GDP

2004 2005 2006 2007 2008 2009 LP Gas 0.1% 0.1% 0.0% 0.1% 0.2% 0.2% Electricity 0.6% 0.7% 0.6% 0.6% 0.7% 0.8% Gasoline IEPS -0.6% -0.2% 0.4% 0.4% 1.8% 0.4% Total 0.1% 0.5% 1.1% 1.2% 2.7% 1.4% Source: SHCP, SENER, and Pemex.

Electricity The energy sector, both oil and electricity, is considered strategic. Transmission and distribution of electricity is state controlled – as defined by the constitution – through the Comisión Federal de Electricidad (CFE), which has 181 plants, as of 2010.

Table 44: Generation capacity by type of fuel input 2004 2005 2006 2007 2008 2009

Fossil Fuels 55% 54% 54% 53% 53% 52% Alternative resource 45% 46% 46% 47% 47% 48% Source: CFE.

Figure 96: Generation by type of source

Hydrocarbon , 40.7%

Independent Producers,

32.2%

Water , 14.4%

Coal, 7.1%

Nuclear, 2.9%

Geothermal and Wind, 2.8%

Source: CFE.

Mexico produced in 2010 FY 155,586 GW/hour, the monthly average rising to 12,966 GW/hour. However, the level of production has decreased since 2000. The 12M rolling average growth rate of electricity production has been negative since 2002, posting a positive growth rate only from 2Q05 until 3Q06 and from 2Q10 to 4Q10.

Power generation has seen some private-sector involvement under different plans, such as independent power producers. Independent producers represented 33% of total electric production in 2010. Foreign companies such as AES, Union Fenosa, Gas Natural, InterGen, Mitsubishi, EDF International, Iberdrola, TransAlta, and Mitsui operate in Mexico.

Figure 97: Power generation by independent producers

1% 2%

11%

16%

22% 21%

27%

31% 32% 33% 33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2000

2001

2002

2003

2004

2005

2006

2007

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2009

2010

Source: CFE.

Figure 98: Electricity production (12M rolling average) and growth rates

-10%

-8%

-5%

-3%

0%

3%

5%

8%

10%

13%

0

2,000

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Dec-

08

Dec-

10

bn of

wat

ts / h

our

Growth yoy Total energy generated Source: INEGI.

48



On October 11, 2009, the Mexican government closed state-owned electricity provider Luz y Fuerza del Centro (LyFC). The company had been chronically loss making for many years. The operations were absorbed into the CFE. The company employed nearly 40,000 workers, who were in charge of providing electricity to 20 million people (19% of the total population) across five states (Distrito Federal, Estado de México, Morelos, Hidalgo, and Puebla).

Table 45: Electricity sales by region, as of September 2010 Region Share

Central 34.3% Northeast 12.9% West 26.1% North 13.1% Southeast 13.6% Source: INEGI.

Residential customers make up 90.9% of total clients, while industrial clients are 1.1%. By revenue, households represent 27%, while industrial clients make up 57%.

Table 46: Clients and sales by sector, as of August 2010 No. Of Clients Sales

Household 90.93% 27.11% Agriculture 0.26% 5.37% Industrial 1.12% 57.61% Commercial 6.95% 6.13% Services 0.74% 3.77% Source: CFE.

Figure 99: Domestic and industrial energy consumption index

-

50

100

150

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250

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350

Jan-

83

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Jan-

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Jan-

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Domestic energy consumption index Industrial energy consumption index Source: INEGI.

Figure 100: Average electricity price by type of customer Nominal Ps/kWh

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

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2010

Residential CommercialServices AgricultureMid-size company Big Industry

Source: SENER.

Tourism Tourism is a key industry for Mexico. It is one of the most important sources of foreign exchange, generating US$11.8bn of inflows in 2010, an increase of 5% yoy. This had suffered in 2008-09with the economic crisis, ‘swine flu’, and weaker Peso. These 2010 inflows are still 10% below the 2008 level.

Figure 101: 12M moving average spending per international tourist USD

0100200300400500600700800900

Jan-

81Se

p-82

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-84

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p-87

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Jan-

06Se

p-07

May

-09

Source: Banxico.

49



Figure 102: 12M moving average inflows from international tourists USD millions

100

200

300

400

500

600

700

800

900

Jan-

81Ja

n-82

Jan-

83Ja

n-84

Jan-

85Ja

n-86

Jan-

87Ja

n-88

Jan-

89Ja

n-90

Jan-

91Ja

n-92

Jan-

93Ja

n-94

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09Ja

n-10

Source: Banxico.

Mexico tourism is mainly domestic. For 2010, 140.6 million tourists were domestic; this represented 86% of the total, while 21.3 million were international. The target of the government is to reach 166 million domestic tourists (85% of total) and 29 million international (15% of total) by 2012. In March 2011, the Federal Government, governors, and senators signed a national agreement to work to position Mexico among the top 5 global tourism destinations by 2018.

In 2009 Mexico suffered from the flu AH1N1 outbreak, which affected negatively the international image of Mexico as a safe tourist destination, so from April to September 2009 international tourists decreased, 20% yoy on average, with the sharpest decrease posted in May, -52% yoy.

In 2010, 74.1% of international tourists were from North America (59.4% US and 14.7% Canada), 12.6% from Europe, 7.4% from Latin America, 1.4% from Asia, and 4.5% other. This sector employs directly an estimated 2.5m people. Hotel and food services oriented to tourism make up 4% of the total service sector.

According to the World Tourist Organization, in 2009, México was the 10th most popular international destination, by arrivals. The top three spots were France, the US, and Spain. Among emerging economies, China was 4th and Turkey 7th.

Table 47: Top 10 countries by international arrivals Country Millions of Passengers Growth rate yoy, in (%)

2007 2008 2009 2007 2008 2009 France 81.9 79.3 74.2 3.9 -3.2 -6.3 US 56.0 58.0 54.9 9.8 3.6 -5.3 Spain 58.7 57.3 52.2 1.1 -2.3 -8.7 China 54.7 53 50.9 9.6 -3.1 -4.1 Italy 43.7 42.7 43.2 6.3 -2.1 1.2 UK 30.9 30.2 28.0 0.7 -2.2 -7 Turkey 22.2 25 25.5 17.6 12.3 2 Germany 24.4 24.9 24.2 3.6 1.9 -2.7 Malaysia 21.0 22.1 23.6 NA 5.1 7.2 Mexico 21.4 22.6 21.5 0.1 5.9 -5.2 Source: WTO.

Over the last ten years, the country has averaged around 20 million international tourists per year. According to the latest UNWTO Tourism Highlights report, in 2009, 21.5 million international tourists visited Mexico, a -5.2% growth rate yoy vs. the 5.9% growth rate seen in 2008. Mexico attracted 15.3% of all the visitors to the Americas, just behind the US with 39% and well above Brazil’s 3.4%.

The economic crisis has impacted tourism. Aeronautical passengers, both domestic and international, suffered from two different negative shocks – namely the economic crisis (preceded by high oil prices), which pushed several airlines into bankruptcy, and then the 2009 influenza outbreak. At the peak of the outbreak, in May 2009, aggregate passenger traffic fell 42% (-35% domestic and -53.7% international).

Figure 103: Passenger growth rate (public companies)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Jan-0

7Ma

r-07

May-0

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l-07

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Jan-1

1

Domestic International


Efforts to promote tourism are focused on Cancun and the Riviera Maya, followed by Los Cabos and by Loreto in the northwest. That said, Caribbean beaches are by far the most popular, as they also enjoy the benefit of being close to the Mayan heartland and archaeological attractions such as Tulum and Chichen Itza.

50



Figure 104: International tourist arrival growth rate, yoy

-60%-45%-30%-15%

0%15%30%45%60%75%90%

Jan-

07

May-0

7

Sep-

07

Jan-

08

May-0

8

Sep-

08

Jan-

09

May-0

9

Sep-

09

Jan-

10

May-1

0

Sep-

10

Source: Banxico.

Beverages Latin America is an attractive region for the beverage industry, given demographics and growing purchasing power. The Mexican beer industry grew at an average rate of 7% of sales from 2005 to 2010, while sparkling drinks posted an average growth rate of 4% for the same period.

The bottler industry is quite fragmented, with 12 regional players. As per the latest info available from the Mexican Association of Soft-drink Producers (www.anprac.org.mx), the industry is comprised of 131 bottling plants, 415 distribution centers, and +35,000 formal distribution vehicles. The industry employs directly 132,000 people. This industry’s main raw material is sugar, which it consumes at a pace of approximately 2m tons per year. In the last decade, the Mexican soft-drink industry invested annually an average of almost US$600m in total CapEx. There are over 1.3m points of sale that sell soft-drinks in Mexico, of which over 1m are mom & pop stores. Of Mexico’s total GDP, soft-drinks represent 0.4% of total. Soft-drinks account for 1.45% of the consumer price index (CPI) and 4.3% of the “basic goods basket” sub-index of the CPI.

There are two major beer producers in Mexico, Grupo Modelo, with 60% share, and FEMSA Cerveza (acquired in 2010 by Heineken), with 40% share. FEMSA Cerveza has a stronger presence in the northern and southern regions of the country, while Grupo Modelo has stronger presence in the central belt. Combined they have 13 plants in Mexico. Grupo Modelo has 7 plants, with an installed capacity of 65m hl, and sold in Mexico 36m hl in 2010.

As of 2009, Modelo is the world’s 7th-largest beer producer (by hectoliters sold globally). This is behind Anheuser-Busch InBev, SABMiller, Heineken, Carlsberg, Tsingtao (Group), and Molson.

Mexicans consumed on average 60 liters of beer in 2009, according to Plato Logic, compared to around 81 liters in the US. Plato Logic estimates that men between 18 and 45 years of age are the primary market for its beer operations. They estimate that in 2025 18% of the population will fall into this category.

Mexico is estimated to be the third most attractive market globally on the basis of future volume growth (2008-2015) – by consultant Plato Logic – behind China and Brazil and ahead of Vietnam and India.

Figure 105: Beer sales (12M moving average) and sales growth rate In Ps bn

-2%0%2%4%6%8%10%12%14%16%18%

0.0

1.0

2.0

3.0

4.0

5.0

6.0De

c-05

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n-06

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06De

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n-07

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07De

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08De

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n-09

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09De

c-09

Mar-1

0Ju

n-10

Sep-

10De

c-10

Beer sales 12M moving average Growth rate Source: INEGI.

The beverage sector is defensive during economic downturns. The correlation of industry sales (in Ps) growth to GDP growth is low, whilst the correlation of volume and real GDP growth was high, at 53%, in 1994-2010. Mexican bottlers have pricing power and are able to pass on price increases to the consumer.

Mexico has the second-highest per capita cola consumption worldwide. According to the ANPRAC (Asociación Nacional de Productores de Refrescos y Aguas Carbonatadas) the per capita consumption of sparkling drinks was around 150-160 liters per year in 2004-2009.

http://www.anprac.org.mx/

51



Figure 106: Sparkling beverages sales (12M moving average) and sales growth rate In Ps bn

-2%0%2%4%6%8%10%12%14%16%18%

0.0

1.0

2.0

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r-10

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10Se

p-10

Dec-1

0

Beer sales 12M moving average Growth rate Source: INEGI.

Table 48: Sparkling beverages consumption Liters

2002 2003 2004 2005 2006 2007 2008 Per Capita 147.2 147.3 148.1 155.8 157.9 160.1 158.6 % Growth -0.80 0.10 0.50 5.20 1.30 1.40 -0.9 Source: ANPRAC.

Figure 107: Coke bottlers’ areas of operation in Mexico

Source: Company reports and J.P. Morgan estimates.

Retail Commerce and trade is the largest subsector of the services industry in Mexico, accounting for 16% of GDP as of 4Q10 and 26% of the total service sector. According to the Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD) the average growth rate of same store sales since 2006, taking into account all type of stores, has been 1.7%. This saw a major decrease starting in 1Q08, when the economic crisis began.

Figure 108: 3M rolling average Same Stores Sales growth %

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Mar

-06

Jun-

06Se

p-06

Dec

-06

Mar

-07

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Source: ANTAD.

Figure 109: Self service store sales growth

-5%

0%

5%

10%

15%

20%

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

ANTAD INEGI Source: INEGI and ANTAD.

Walmex (the Mexican-listed subsidiary of Walmart USA) is the leading retailer in Mexico. As of 2010 Walmex had a market share in super centers of 37%. Nevertheless, supermarket competition is in the informal sector, which according to Nielsen represents 50% of the total retail market.

On the back of this, many retail companies have developed low-cost formats targeting lower-income customers – for example Walmex opened 220 Bodegas Aurrera in 2010 compared to just 20 Walmart, 10 Sam’s, and 6 Superama formats.

52



Figure 110: Supermarkets Market Share, 2010FY % of Sales from ANTAD members

Walmex37%

Soriana 10%

Chedraui 6%

Comerci 6%

Others 41%

Source: ANTAD.

Commerce and trade make up around 26% of the tertiary sector, which makes up around 61% of GDP. As of the 2010 commercial survey made by INEGI, 80% of the economic units in the commercial sector were developing some sort of activity that involves the retail commerce sector, while 20% is involved with the wholesale sector.

Figure 111: Wholesale revenues sector breakdown

Food and Beverages

54%Raw Materials

21%

Machinery and

Industrial Equipment

14%

Others 11%

Source: INEGI.

Figure 112: Retail revenues sector breakdown

Auto/Autoparts29%

Departamental stores19%

Supermarkets 15%

Healthcare 13%

Computers and domestic

goods6%

Textiles and clothes

5%

Food and Beverages

2%Others 11%

Source: INEGI.

Consumers held up well to the 2009 crisis. The basket of 100 FMCG (fast-moving consumer goods) tracked by Nielsen saw flat volumes in 2009, and INEGI retail sales fell 5.2% despite a 6.1% GDP decline. One of the main reasons was low inflation. During the 1995 ‘tequila’ crisis, GDP fell 6.2%, but inflation was 35%, and retail sales fell 20%.

Figure 113: Inflation and Retail Sales, oya

Source: Banxico and INEGI.

A number of behavioural consumer changes were seen in the crisis. (1) Durable goods purchases postponed in favor of FMCG. (2) Convenience traded for price (substituted ready-to-eat meals, for example). (3) Product substitution increased (facial tissues swapped for toilet paper, for example). (4) Smaller-size, lower --per-unit products favored (the reverse of higher income country consumer trends, where they fall). (5) Greater sensitivity to promotions, store price comparisons, brand downtrading. (6) Greater use of ‘mom & pops by lower-income segments, given proximity (ability to make multiple small purchases, and lower transport cost) and credit availability.

53



Nielsen estimates 500,000 mom & pop stores exist, representing 40-50% of FMCG sales. Both segments expanded during the crisis: mom & pops as demand expanded and as they became an employment destination for the unemployed; and formal supermarkets as they continued their floor expansion plans. There is evidence this expansion has increased competition and contributed to lower inflation. Manufacturing The Mexican manufacturing sector has passed through a significant transformation since the Mexican government initiated the Border Industrialization Program in 1965, as a response to the demise of the US government’s ‘Bracero Program’ in 1964. Since then, the free trade agreements implemented in 1980s and 1990s have been the cornerstone for Mexico’s manufacturing-sector boom.

The industrial sector in Mexico has been around 29-33% of the GDP since the 1980s. Industrial production is divided into three sectors: Manufacturing; construction; mining, electricity, gas, and water. The manufacturing sector is the biggest constituent of the Mexican industrial production – representing 30% of GDP as of 4Q10.

This sector is inherently related to exports. For example, in 2010, electric machinery and auto/auto parts manufactures made up 55.2% of total exports, producing US$164 billion. Manufacturing employs around 26% of the total economically active population, i.e., 11.2 million people (73% male).

Figure 114: Industrial production share of the GDP

27%

28%

29%

30%

31%

32%

33%

34%

35%1Q80

4Q81

3Q83

2Q85

1Q87

4Q88

3Q90

2Q92

1Q94

4Q95

3Q97

2Q99

1Q01

4Q02

3Q04

2Q06

1Q08

4Q09


US industrial production is heavily correlated to Mexican manufacturing production, posting a correlation of 97% during the period of January 1980 to February 2011, almost a perfect correlation. Many factors explain this correlation, including low labor costs in Mexico, geographical advantages, and a well-exploited free trade agreement. However, Mexican manufactures are not only about low-cost labor and a depreciated currency. Factors like cluster creation, government support, and a highly skilled labor force enhance the advantages that have positioned Mexico as a leading manufacturing country.

Figure 115: Industrial Production share of the GDP, breakdown by sector

0%

5%

10%

15%

20%

25%

30%

35%

1Q052Q053Q054Q051Q062Q063Q064Q061Q072Q073Q074Q071Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q104Q10

Manufacturing, nsa , % share Construction, nsa, % share

Mining, nsa , % share Electricity, gas, and water, nsa, % share


Auto and Autoparts Auto industry a big deal. This is Mexico’s 2nd-largest export (17% of total) and contributes 17% of industrial GDP and 13% of employment. It is the world’s 10th-largest car producer. Over 80% goes for export. Mexico production rebounded 50% in 2010 and was a key driver in Mexico’s GDP recovery.

Exports set to continue growing. Mexico auto exports rebounded 50% last year to 1.86m units, an all-time high. This was led by the US (69% total). Mexico import market share of the US increased to 11% from 8% pre-crisis. J.P. Morgan US auto analyst Himanshu Patel forecasts 13% US car sales growth in 2011. Assuming stable Mexican market share, this could put Mexican auto exports at 2.06m, up 29% vs a pre-crisis 2007.

54



Figure 116: Production & Export of Light Vehicles (000)

Source: AMIA.

A key source of FDI. J.P. Morgan estimates US$3bn of auto industry foreign direct investment plans were announced last year. AMIA (the Mexico Auto Industry Association) estimates the sector has attracted US$12bn of FDI in the last eight years.Competitiveness strong. Mexico has advantages in labor and land cost, hours worked, and proximity to market. AMIA highlights average salaries ($379/m in China and Mexico, and $726 in Brazil), longer work week (46 hr/week in Mexico vs 41 in China and 35 in Brazil), shorter time to market (China to New York shipping 30 days, 16 from Brazil, vs 6 from Mexico), and land cost (Mexico industrial rental $43/sq.ft/pa vs $49 in China, $61 in Brazil). Mexico also has a more competitive real FX rate.

Domestic growth sluggish but could double. Domestic sales rebounded 9% in 2010 to 820k units, but this is still down 28% from the 2006 high of 1.14m units. Per capita sales are low, at 7 per 1,000, vs Brazil’s 17, and 40-50 in developed markets. Assume per capita sales similar to Brazil, and the Mexican market would be more than double (1.8m) its current size.

Figure 117: Domestic Auto Sales – Mexico vs Brazil

Source: AMIA, ANFAVEA.

onstrained by cyclical and structural issues. A weak used car market, having been flooded last decade by US used car imports (since reduced); high taxes of 16% VAT + 4% new vehicle tax + 3% ownership tax (now dropped); low credit penetration (banking credit/GDP <15%). Cyclically, consumer confidence is still fragile and postponing durable purchases.

Infrastructure Mexico is ranked 79th globally on the overall quality of its infrastructure (out of 139 countries), according to the World Economic Forum (WEF), somewhat below its overall country ranking of 66th. Mexico is better ranked for roads and airports infrastructure, whilst the ports, mobile phone penetration, and electricity supply are the worst ranked. At the beginning of the Calderon Administration, the National Infrastructure Plan was announced, planning to inject US$233bn in different infrastructure projects, to raise the coverage, quality, and competitiveness of infrastructure.

Table 49: Overall Mexico infrastructure ranking, out of 133 Rank

Quality of overall infrastructure 79 Quality of roads 62 Quality of railroad infrastructure 76 Quality of port infrastructure 89 Quality of air transport infrastructure 65 Available seat kilometers 20 Quality of electricity supply 91 Telephone lines 72 Mobile telephone subscriptions 93 Source: World Economic Forum.

Figure 118: Quality of Overall Infrastructure in Lat Am

0

1

2

3

4

5

6

Chile

24

Puer

to R

ico 4

3

El S

alvad

or 4

4

Guat

emala

50

Urug

uay 5

9

Pana

ma

66

Costa

Rica

77

Mex

ico 7

9

Hond

uras

82

Braz

il 84

Peru

92

Colom

bia 9

7

Ecua

dor 9

8

Arge

ntina

102

Boliv

ia 10

9

Dom

inica

n …

Nica

ragu

a 11

4

Vene

zuela

117

Para

guay

135

Score Global Mean

Source: World Economic Forum.

55



Unfortunately a number of the most highly profiled of these projects have been delayed by the credit crisis and recession, including Punta Colonet (new multimodal port) and the Riviera Maya airport.

Roads Roads have been one of the main beneficiaries of recent infrastructure spending, with the country having one of the lowest road densities among major economies, significantly smaller than other LatAm countries’. The national car fleet is around 31m vehicles.

Table 50: Transport Usage – By Weight and No. of Passengers Type % of Weight % Passengers

Road 53.0% 98.00% Maritime 30.4% 0.69% Rail 16.5% 0.01% Air 0.1% 1.3% Source: SCT.

The Government’s toll road program is one of the most successful parts of President Calderon’s 2007 five-year $140bn infrastructure program. A total of 43 projects are at various stages, covering 2,300km of highway and involving a total investment of $6.6bn. 930km of road have been completed or improved since the program really got going in 2006, with a total of $1.7bn invested. 850km of road, split between 17 projects, are under construction, with a total expected investment of $2.8bn. An additional five have been awarded, with construction started in Q1 2011]. 7 further projects are set to be launched by mid-2011.

This strategy was impacted by the 2008-9 recession, which saw projects downsized to a more manageable $200m-$500m range. It was also tougher to get equity participation, It was also tougher to get bank participation. Banks would only finance a smaller proportion; they wanted to do club deals, for shorter time frames, and charge more.The spending policy is aimed to increase cross-country roads. In order to build and maintain the National Highway Network, the SCT calculates that US$6.0bn is needed. The federal government had structured three ways to encourage private investment in highways: Concessions, Highway Assets Utilization, and Service Provision (PPS).

Table 51: Investment in roads by financing plan Ps bn

In

operations Under

construction Bid in

process

Package under

preparation Total Concession 11 6 2 35 Highway Assets Utilization 2 0 3 2 70 PPS 1 6 0 5 49 Total 14 12 5 7 155 Source: SCT.

The three basic public-private partnership models are: 1) Standard concession model, financed by toll revenue, with Mexican development bank Banobras providing some financing support. 2) PPS Service Model, a copy of UK’s Private Finance Initiative, using public funds for private tenders to upgrade toll-free roads. 3) Asset Utilization Model, or ‘FARAC’ Model, packaging brownfield modernization and greenfield projects to pool risks.

Figure 119: Mexico national highway network

Source: SCT.

Figure 120: Investments in Roads (P$bn)

Source: SCT.

56



Figure 121: Mexican roads as of 2005

Source: Plan Nacional de Infraestructura.

Figure 122: Mexican road estimates for 2012


Figure 123: Road Density Km of road per 100 sq. km of land area

-50

100 150 200 250 300 350 400 450 500

Sing

apor

eN

ethe

rlan

dsJa

pan

Ger

man

yFr

ance

Switz

erla

nd UK

Den

mar

kA

ustr

iaIn

dia

Kore

a, R

ep.

Cost

a Ri

caU

nite

d St

ates

OEC

D m

embe

rsCh

ina

Indo

nesi

aM

exic

oCa

nada

Colo

mbi

aPe

ruRu

ssia

Source: World Bank. Data as of end-2007.

Airports Mexico has 61 significant airports, divided among 4 large operators, and individual private concessionaries. In the 1990s Aeropuertos y Servicios Auxiliares (ASA) was a state-owned independent company that administered, operated, and maintained the airports. In 1997 the federal government began to privatize the airports, dividing them into four main packages.

Grupo Aeroportuario del Sureste (ticker: ASUR) was the first company to acquire a package concession, obtaining the southeast group that contained 9 airports, including Cancun – Mexico’s most popular tourist destination. In September 2000 ASUR went public, and today it trades on the Mexbol and NYSE.

Grupo Aeroportuario de Pacífico (ticker: GAP) obtained the second package granted by the government; this was the Northeast Pacific package and consisted of 12 airports, including high-traffic destinations such as Guadalajara, Tijuana, PuertoVallarta, and Los Cabos. GAP went public in 2006 and trades on the Mexbol and NYSE. GAP is the biggest public airport company.

Grupo Aeroportuario del Centro Norte (ticker: OMA) obtained in 2000 the concession to operate the Central/North package, which includes Monterrey airport, the country’s major business destination after Mexico City. It went public in 2006 and today trades on the Mexbol and NASDAQ.

The state-owned ASA now operates 19 airports, which include Mexico City airport (AICM); the largest in terms of passengers. In 2010 the AICM reported 24.1 million passengers; this is flat from the previous year.

57



Figure 124: Mexican public airport companies’ monthly traffic performance

0

500

1000

1500

2000

2500

Jan-

07

Mar

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Jul-0

7

Sep-

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10ASUR GAP OMA


Figure 125: Mexican public airport companies’ monthly traffic growth rate

-0.6

-0.4

-0.2

0

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1

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Asur GAP OMA Source: J.P. Morgan estimates, company data.

Figure 126: Mexican airports


Railroads Mexican railroad development is badly ranked, according to the World Economic Forum. No country in the region is above the global mean score.

Figure 127: Quality of railroads

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Pana

ma 5

8

Mex

ico 76

Chile

77

Arge

ntina

82

Dom

. Rep

ublic

83

Braz

il 87

Peru

91

Boliv

ia 94

Cost

a Rica

100

Vene

zuela

101

Colom

bia 10

2

Hond

uras

105

Urug

uay 1

08

El S

alvad

or 11

0

Ecua

dor 1

13

Guat

emala

114

Para

guay

115

Score Global Mean

Source: WEF.

The Mexican railroad network hasn’t been growing. In 1990 it had 26,400km of track, and by 2010 this figure was almost flat at 26,700 . Over the same period, freight transportation volume grew 102.5%, from 46.4m tons to 94m tons. By 2012 the federal government is planning to build an additional 1,418km of railroad track and to increase the average speed from 24km per hour to 40km.

Former President Zedillo privatized the Mexican railroad network. Ferrocarriles Nacionales de Mexico was the state-owned railroad company, and currently it is being liquidated. Three major private companies emerged from the privatization process.

# Ferromex, which is owned mainly by Grupo Mexico, is the biggest railroad company, with 8,500km of railroad network, which is around 32% of the national railroad network. It covers the Northwest, West and Central parts of Mexico.

# Kansas City Southern de Mexico covers 4,200km, representing around 16% of the national railroad network, covering the Center and Northeast part of Mexico.

# Ferrosur covers 1,500km, mainly in the Southeast part of Mexico.

58



Figure 128: Railroads as of 2006


Figure 129: Rail lines (total route-km)

-

50,000

100,000

150,000

200,000

250,000

USRu

ssia

Chin

aIn

dia

Cana

daFr

ance

Germ

any

Braz

ilM

exic

oSo

uth

Afric

aJa

pan

Italy

Unite

d Ki

ngdo

mSp

ain

Aust

riaCh

ileCu

baKo

rea,

Rep

.Ne

ther

land

sPe

ruCo

lom

bia

Source: World Bank.

Ports Mexico is badly positioned in a LatAm context, behind Panama, Chile, and Puerto Rico in the development of its port system but ahead of Brazil and Argentina. Punta Colonet was supposed to be the main project for this administration. This port was designed to compete with Long Beach in California in trans-Pacific trade flows from Asia but has been delayed by the financial crisis.

Mexico had 116 ports as of 2010. Manzanillo is the country’s largest container port, followed by Veracruz and Altamira. Private-sector investment in port infrastructure has been growing and currently makes up around 30% of total investment.

Table 52: Investment in ports by type of source Ps bn 2004 2005 2006 2007 2008 2009 2010 Public 1.6 2.6 2.9 2.5 4.1 5.3 5.5 Private 6.7 5.6 4.4 4.1 5.2 2.5 2.4 Total 8.3 8.2 7.3 6.6 9.4 7.8 7.9 Total growth rate 154% 0% -12% -10% 44% -16% 1% Source: SCT.

Figure 130: Mexican Port Container Traffic – Growth rate yoy

7.7%

13.0% 12.1%

25.5%

14.4%

8.3%

-13.0%

8.0%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2003 2004 2005 2006 2007 2008 2009 2010

Source: SCT.

59



Annex 1Mexico Pension Funds’ Investment Regime Summary

Limits by Type of Pension fund1 5 4 3 2 1 Age= < 26 27 to 36 37 to 45 46 to 55 56 +

Value at Risk [VaR historical(1-α=95%, 1 day)] 2.0% 1.6% 1.3% 1.0% 0.6%

Equity2 35% 35% 25% 20% 0%

Foreign currency 30% 30% 30% 30% 30%

Derivatives:

Marke

t

Risk

Interest rates, FX and equity (credit derivatives not allowed) yes yes yes yes yes

Government securities 100% 100% 100% 100% 100%

mx AAA-rated securities3 100% 100% 100% 100% 100%

mx AA-rated securities 50% 50% 50% 50% 50% Cred

it

Risk

Corp

orate

mx A-rated securities 20% 20% 20% 20% 20%

mxAAA-rated securities in MXN or BBB+ in authorized currencies4 5% 5% 5% 5% 5%

mxAAA-rated securities in MXN or BBB- in authorized currencies 3% 3% 3% 3% 3%

mxA-rated securities in MXN 2% 2% 2% 2% 1% Loca

l5

mxBBB or BB in authorized currencies 1% 1% 1% 1% 0% A-rated foreign securities from one issuer or counterpart 5% 5% 5% 5% 5% Co

ncen

tratio

n

Risk

Fore

ign

Holdings of an issuance6 35% 35% 35% 35% 35%

Foreign securities (if fixed-income, minimum rate is A-) 20% 20% 20% 20% 20%

Securitizations7 40% 30% 20% 15% 10%

Structured securities8 15% 15% 15% 10% 0% Othe

r

Limits

Inflation-linked bonds (minimum limit) no limit no limit no limit no limit min 51%

Securities endorsed by related parties 15% 15% 15% 15% 15%

Confl

ict of

inter

ests

Securities endorsed by parties with control group related to the Afore9 5% 5% 5% 5% 5%

1 All limits expressed as percentages of assets under management, except the maximum ownership of one issue. All limits are maximums except the inflation protected bonds. 2 Includes authorized equity indices listed on the Mexican Stock Market (BMV), individual stock that belong to authorized equity indices listed on the BMV, Mexican issuers mandatory debt and large market capitalization IPOs. New limits started in June 15, 2010. 3 Rating scale is local for securities denominated in pesos and global for offshore assets. The issuance should be rated by at least two rating agencies. 4 Issuer or endorser in the percentage it guarantees. Counterparty exposure in repos and derivatives is added to the permitted limit. 5 The Risk Analysis Committee (CAR) will determine credit rates below "A" for debt securities (including subordinated debt) with a maximum limit of 1% for the funds 2 through 5 and 0% for fund 1. 6 It is the maximum percentage of the outstanding that all funds (Siefores) operated by the same fund manager (Afore) can hold. 7 Securitizations must comply with Circular 15-19 appendix K for the SPV to be considered as an independent issuer and thus lay in the bucket of securitizations. 8 Includes CKDes, IPOs of small market capitalization, individual stocks that are not included in any authorized equity index, and Mexican REITs (FIBRAS). 9 Limit is established in the SAR law, Art. 48, Paragraph X. Under exceptional circumstances it could be increased up to 10%. For parties whose board members belong to the Afore's board or have influence on it this limit is 0%. Source: CONSAR.

60



Annex 2 Table 53: Debt instruments

Instrument Type Coupon Index Day-count Maturities Size* Total CETES Fixed rate Zero-coupon - Linear, Act/360 28, 91, 182, and 364-day 543,834 17% BONOS Fixed rate Semiannual - Bond, Act/360 3, 5, 10, 20, and 30-year 1,594,066 51% BONDES D Floater 28-day 28-day TIIE Linear, Act/360 3 and 5-year 456,866 14% UDIBONOS Linker Semiannual UDIS Bond, Act/360 3, 10, 20, and 30-year 559,297 18% * MXN 3,154,062.6 million as of April 2011. Source: J.P. Morgan.

.

61



Mexico Dashboard Data

62



Ticker Price* JPM Portfolio MSCI Deviation EPS growth DY ROE AnalystLocal Rating 4 weeks YTD Weight Weight (%) 10E 11E 10E 10E 11E

Currency (%) (%) (%) (%) (x) (x) (%) (%)Mexico 33,818 2.0 0.6 16.1 18.8 -2.7 14.7 12.8 39.5 3.3 17.6AMX AMX US 56.4 OW 0.3 -1.7 7.1 5.9 1.2 14.0 11.7 2.6 0.8 25.9 Baggio, AndreFirst Cash Finan FCFS US 38.4 OW -3.4 23.8 3.0 0.0 3.0 17.4 15.4 26.3 na 20.3 Laidler, BenKansas City Sou KSU US 53.4 OW -1.5 11.6 3.0 0.0 3.0 19.2 15.5 34.3 na 9.6 Wadewitz, Thomas RWalmex WALMEXV MM 35.8 OW 3.7 1.1 3.0 2.0 1.0 26.9 22.5 20.9 1.1 18.8 Teixeira, Andrea

Source: Bloomberg, MSCI, J.P. Morgan estimates. All estimates are for the calendar year. Recommendations: OW = Overweight, N = Neutral, UW = Underweight. Updated as of April 25, 2011

100.0%7.5%

100.0%

HOMEX* 7.5%ICA* 7.5%

CEMEXCPO 15.0%GFNORTEO 15.0%

10.0%URBI* 10.0%

MEXCHEM* 10.0%ALFAA

10.0%7.5%7.5%

GAPB 10.0%

15.0%12.5%12.5%12.5%

WALMEXVFEMSAUBDTELMEXL

GMODELOC

Source: J.P. Morgan

TLEVICPOBIMBOA

KIMBERAARCA*

Mexico Component of JPM's Latin America Model Portfolio

Defensive Basket : JPMXDFSV Cyclical Basket : JPMXCYCLAMX 15.0%

Change P/E

J.P. Morgan Thematic Baskets

GMEXICOB 15.0%

Our Latin America model portfolio is a vehicle to express our strategy views on regional equity markets, sectors, and stocks. This portfolio will normally include stocks that will be constructed relative to the MSCI EM Latin America Index. The portfolio is primarily driven by our fundamental analyst views, and we use our analysts’ published company valuation and estimates to support inclusion, but a strategy overlay is incorporated and hence the published strategy may on occasion differ from analyst views. Fundamental analysts' ratings are driven by company attractiveness relative to their sector coverage, whereas as strategists we take a regional, Latin America-wide view. The portfolio can include: 1) non-Latin America listed stocks, to the extent the region is a significant driver of the company's business; and 2) stocks not currently covered by JPM analysts, to the extent these are heavily weighted MSCI Latin America Index companies, though these companies must always be incorporated at a neutral relative weighting so as to express no strategy or fundamental view. The LatAm model portfolio is always updated and modified through our "LatAm Key Trades" publication. Please see the publication on www.morganmarkets.com for further information, including important disclosures.

Bloomberg subscribers can use the ticker JPMXDFSV <Index> and JPMXCYCL <Index> to access tracking information on baskets created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time, the performance of JPMXDFSV and JPMXCYCL could diverge from any returns quoted in our research, because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or additional reports relating to it. For more information, please contact your J.P. Morgan salesperson or the Delta One Desk.

63



MSCI Mexico: Market Performance and Valuation by Sectors and Stock

Sector/Stock Weightings% Total market cap ADTV*

US$ Mn US$ Mn PE PB DY 1M 3M 6M YTD 12M 1M 3M 6M YTD 12MConsumer Discretionary 9.2 25,520 34 20.6 3.2 1.1 -0.8 -3.8 5.7 -9.1 -8.1 2.3 0.0 12.3 -3.4 -3.7Televisa 6.2 10,953 21 21.2 3.6 2.3 -5.2 -7.4 -0.6 -14.9 5.4 -2.2 -3.7 5.7 -9.6 10.5Elektra 1.8 10,564 6 NM 3.4 0.3 0.9 0.8 16.3 -3.1 -22.4 4.0 4.8 23.6 2.9 -18.6Homex 0.6 1,580 3 11.8 1.6 0.0 5.8 -16.5 -23.6 -21.8 -15.2 9.1 -13.2 -18.7 -16.9 -11.0Urbi 0.7 2,423 3 14.4 1.8 0.0 7.2 0.4 6.8 -0.4 -2.8 10.6 4.4 13.6 5.9 1.9Consumer Staples 26.9 93,332 76 27.5 4.4 1.2 3.5 4.3 8.9 -6.4 14.8 6.7 8.4 15.8 -0.6 20.3Walmex 10.8 55,008 40 32.6 5.2 1.0 3.7 4.3 7.2 1.1 14.7 7.0 8.4 14.0 7.5 20.3Femsa 7.7 13,640 15 18.3 2.1 1.1 4.0 10.9 10.8 6.0 25.5 7.3 15.3 17.8 12.6 31.6Grupo Modelo 2.2 3,996 7 23.1 3.0 2.9 3.8 -1.4 6.7 -3.7 4.1 7.1 2.5 13.5 2.3 9.2Kimber 1.8 3,373 5 18.6 9.5 4.6 -2.8 -0.9 -7.7 -6.3 -0.8 0.3 3.1 -1.9 -0.4 4.0Bimbo 1.7 10,237 4 21.8 2.7 0.5 4.3 -0.6 9.1 -76.0 -5.2 7.6 3.3 16.0 -74.5 -0.6Arca 1.4 4,901 3 21.2 3.2 2.1 4.1 6.6 39.9 18.0 48.5 7.4 10.8 48.7 25.3 55.7Coca Cola Femsa 1.2 2,177 2 17.4 2.4 1.5 -1.4 -2.6 -1.8 -8.5 10.8 1.7 1.3 4.4 -2.7 16.2Financials 8.1 32,146 38 20.6 3.0 0.8 10.1 12.3 12.1 3.9 26.7 13.6 16.7 19.2 10.4 32.9Banorte 4.6 11,618 28 16.9 2.5 0.3 6.3 7.2 11.8 -1.3 9.2 9.6 11.4 18.8 4.9 14.5Inbursa 2.4 17,370 3 23.3 2.7 1.0 14.2 15.7 12.3 11.8 38.4 17.8 20.3 19.4 18.8 45.2Compartamos 1.1 3,159 7 19.5 6.6 1.1 1.7 -11.3 na -20.0 na 4.9 -7.8 na -15.0 naIndustrials 4.8 18,970 15 15.2 2.6 1.2 12.7 27.7 48.8 25.4 79.9 16.3 32.8 58.2 33.2 88.6Alfa 2.5 8,053 11 16.8 2.6 0.8 14.6 28.7 77.9 40.7 85.4 18.2 33.8 89.1 49.5 94.5GAP 1.1 1,936 2 18.9 1.1 0.9 -3.7 -1.8 6.2 -6.2 5.7 -0.7 2.1 12.9 -0.3 10.9Gcarso 1.3 8,981 2 12.9 2.9 1.7 14.6 33.1 31.9 18.5 90.9 18.2 38.4 40.2 25.9 100.2Materials 17.1 66,357 103 20.2 4.1 0.9 -5.2 -6.3 10.1 -14.8 18.9 -2.2 -2.6 17.1 -9.5 24.7Grupo Mexico 7.1 25,908 58 15.9 3.8 1.2 -13.1 -17.3 -3.7 -23.4 12.4 -10.4 -14.0 2.4 -18.7 17.8Cemex 4.7 8,882 27 NM 0.6 0.0 -3.9 -16.8 4.5 -22.7 -25.3 -0.8 -13.5 11.1 -17.9 -21.7Penoles 2.1 15,139 8 26.9 6.9 1.2 4.0 15.3 34.5 -1.5 56.7 7.3 19.9 43.0 4.6 64.3Mexchem 1.7 6,759 7 21.7 4.1 0.2 3.0 0.8 15.7 -1.2 17.5 6.3 4.8 23.0 5.0 23.3Minera Frisco 1.4 9,670 2 na na na -6.5 -4.6 na na na -3.6 -0.8 na na naTelecoms 34.0 88,267 131 15.1 4.6 2.6 -2.4 -5.4 -6.8 -6.2 4.5 0.6 -1.7 -0.9 -0.3 9.6AMX 31.1 79,095 125 15.3 4.6 2.4 -2.9 -6.5 -9.1 -7.7 4.3 0.2 -2.8 -3.4 -1.9 9.3Telmex 2.8 9,172 6 12.9 4.5 4.6 1.7 4.0 13.2 7.0 6.4 4.9 8.1 20.4 13.7 11.5MSCI Mexico 100.0 324,591 397 18.3 4.1 1.7 -0.5 -2.3 2.7 -5.1 9.3 2.0 1.4 8.7 0.6 14.6Source: MSCI, Datastream, J.P. Morgan. Note:* ADTV is the 6 month average daily traded volume Updated as on 25 Apr 2011

Trailing Consensus Estimates LC Performance US$ Performance

64



IPC Bolsa: Market Performance and Valuation by Sectors and Stock

Sector/Stock Weightings% Total market cap ADTV*

US$ Mn US$ Mn PE PB DY 1M 3M 6M YTD 12M 1M 3M 6M YTD 12MConsumer Discretionary 11.2 29,590 50 20.3 3.1 1.1 -0.4 -4.4 3.3 -9.7 -7.3 2.7 -0.7 9.8 -4.0 -2.8Televisa 6.1 11,208 21 21.2 3.6 2.3 -5.2 -7.4 -0.6 -14.9 5.4 -2.2 -3.7 5.7 -9.6 10.5Elektra 1.7 10,526 6 NM 3.4 0.3 0.9 0.8 16.3 -3.1 -22.4 4.0 4.8 23.6 2.9 -18.6Geo 0.9 1,573 14 6.3 1.1 0.0 3.9 -18.6 -15.3 -25.8 -13.1 7.2 -15.4 -10.0 -21.1 -8.9Urbi 1.0 2,423 3 14.4 1.8 0.0 7.2 0.4 6.8 -0.4 -2.8 10.6 4.4 13.6 5.9 1.9Homex 0.6 1,580 3 11.8 1.6 0.0 5.8 -16.5 -23.6 -21.8 -15.2 9.1 -13.2 -18.7 -16.9 -11.0TV Azetca 0.6 1,470 2 62.2 4.0 1.2 -0.1 1.5 -12.6 -4.4 15.3 3.0 5.5 -7.0 1.6 20.9Ara 0.3 810 1 8.1 1.2 1.9 6.6 -6.8 -4.6 -5.1 -16.7 10.0 -3.1 1.4 0.8 -12.6Consumer Staples 27.1 102,231 80 27.3 4.2 1.2 3.2 4.4 9.1 1.9 13.7 6.5 8.5 16.0 8.2 19.1Walmex 11.9 54,959 40 32.6 5.2 1.0 3.7 4.3 7.2 1.1 14.7 7.0 8.4 14.0 7.5 20.3Femsa 7.4 13,640 15 18.3 2.1 1.1 4.0 10.9 10.8 6.0 25.5 7.3 15.3 17.8 12.6 31.6Bimbo 2.2 10,237 4 21.8 2.7 0.5 4.3 -0.6 9.1 -3.9 -5.2 7.6 3.3 16.0 2.1 -0.6Grupo Modelo 2.2 3,996 7 23.1 3.0 2.9 3.8 -1.4 6.7 -3.7 4.1 7.1 2.5 13.5 2.3 9.2Kimber 1.8 3,359 5 18.6 9.5 4.6 -2.8 -0.9 -7.7 -6.3 -0.8 0.3 3.1 -1.9 -0.4 4.0Soriana 0.5 6,106 1 27.9 2.8 0.5 -2.1 4.4 7.5 -0.4 2.7 1.0 8.6 14.3 5.8 7.7Arca 0.4 4,901 3 21.2 3.2 2.1 4.1 6.6 39.9 18.0 48.5 7.4 10.8 48.7 25.3 55.7Chedraui 0.4 3,266 2 25.9 2.3 0.0 5.7 5.2 4.7 5.9 na 9.1 9.3 11.4 12.5 naCommerci 0.3 637 2 1.6 0.2 4.4 3.2 21.7 46.8 27.0 70.8 6.4 26.5 56.0 34.9 79.1Gruma 0.2 1,130 2 6.9 0.8 3.0 -4.1 -11.3 8.7 0.5 -9.3 -1.1 -7.8 15.6 6.8 -4.9Financials 8.9 35,805 43 20.6 3.0 0.8 9.8 11.5 12.1 3.7 26.2 13.3 15.9 19.1 10.2 32.4Banorte 4.1 11,618 28 16.9 2.5 0.3 6.3 7.2 11.8 -1.3 9.2 9.6 11.4 18.8 4.9 14.5Inbursa 2.8 17,370 3 23.3 2.7 1.0 14.2 15.7 12.3 11.8 38.4 17.8 20.3 19.4 18.8 45.2Comparto 1.3 2,981 7 19.5 6.6 1.1 1.7 -11.3 na -20.0 na 4.9 -7.8 na -15.0 naIncarso 0.4 2,588 1 na na na 1.3 3.8 na na na 4.5 7.9 na na naBolsa 0.3 1,248 4 na na na 1.2 -6.0 11.5 -5.7 14.7 4.4 -2.3 18.6 0.2 20.2Healthcare 0.7 2,590 14 na na na 3.8 -9.7 12.0 -3.1 31.4 7.1 -6.1 19.0 2.9 37.8Lab 0.7 2,590 14 na na na 3.8 -9.7 12.0 -3.1 31.4 7.1 -6.1 19.0 2.9 37.8Industrials 7.8 22,103 24 16.4 2.4 1.3 11.3 23.2 41.4 20.7 67.2 14.8 28.1 50.3 28.3 75.3Alfa 4.3 8,024 11 16.8 2.6 0.8 14.6 28.7 77.9 40.7 85.4 18.2 33.8 89.1 49.5 94.5Gcarsa 1.5 8,978 2 12.9 2.9 1.7 14.6 33.1 31.9 18.5 90.9 18.2 38.4 40.2 25.9 100.2ICA 0.8 1,547 7 23.9 0.9 0.0 5.1 -8.8 -16.8 -11.4 -14.3 8.4 -5.2 -11.6 -5.9 -10.1GAP 0.8 1,936 2 18.9 1.1 0.9 -3.7 -1.8 6.2 -6.2 5.7 -0.7 2.1 12.9 -0.3 10.9Asur 0.4 1,618 2 23.8 1.0 3.9 0.8 1.6 10.3 -2.8 -3.6 4.0 5.6 17.2 3.3 1.1Materials 17.7 68,153 104 32.7 7.7 1.7 -8.5 -7.1 17.9 -21.2 42.5 -3.6 -0.9 29.3 -12.3 52.5Grupo Mexico 7.0 25,908 58 15.9 3.8 1.2 -13.1 -17.3 -3.7 -23.4 12.4 -10.4 -14.0 2.4 -18.7 17.8Cemex 4.8 8,914 27 -7.1 0.6 0.0 -3.9 -16.8 4.5 -19.6 -25.3 -0.8 -13.5 11.1 -14.6 -21.7Penoles 2.5 15,139 8 26.9 6.9 1.2 4.0 15.3 34.5 -1.5 56.7 7.3 19.9 43.0 4.6 64.3Minera Frisco 1.6 9,662 2 na na na -6.5 -4.6 na na na -3.6 -0.8 na na naMexchem 1.5 6,759 7 21.7 4.1 0.2 3.0 0.8 15.7 -1.2 17.5 6.3 4.8 23.0 5.0 23.3ICH 0.4 1,771 1 12.7 1.2 0.0 0.6 -2.6 4.0 -1.6 -7.3 3.8 1.3 10.5 4.5 -2.8Telecoms 26.6 87,669 132 15.0 4.6 2.6 -2.4 -5.4 -6.8 -6.1 4.2 0.7 -1.6 -0.9 -0.3 9.3AMX 23.8 77,870 125 15.3 4.6 2.4 -2.9 -6.5 -9.1 -7.7 4.3 0.2 -2.8 -3.4 -1.9 9.3Telmex 2.4 9,058 6 12.9 4.5 4.6 1.7 4.0 13.2 7.0 6.4 4.9 8.1 20.4 13.7 11.5Axtel 0.3 741 1 11.8 0.9 0.0 3.3 -1.4 -4.4 -2.1 -29.6 6.5 2.5 1.6 4.0 -26.2IPC Bolsa 100.0 348,140 447 40.0 4.6 1.6 0.2 -1.6 4.5 -4.4 8.9 3.4 2.3 11.1 1.6 14.2Source: MSCI, Datastream, J.P. Morgan.* ADTV is the 6 month average daily traded volume Updated as on 25 Apr 2011

Trailing Consensus Estimates LC Performance US$ Performance

65



Value: Mexico Sector Valuations25-Apr-11 Avg. Current 12m Avg. Current Avg. Current

MSCI Index 02-07 Trailing Fwd 2010E 2011E 2012E 02-07 Trailing 2010E 2011E 2012E 02-07 Trailing 2010E 2011E 2012E 2009 2010E 2011E 2012EConsumer Discretionary 565.1 20.6 22.5 15.8 25.2 16.6 14.1 1.5 1.1 0.1 3.2 6.6 3.1 3.0 3.2 2.6 1.3 6.4 12.7 15.8 9.0Consumer Staples 523.0 19.7 29.6 20.0 33.6 21.0 17.9 1.8 1.5 1.3 1.8 1.9 3.0 4.6 5.5 2.9 2.6 23.2 16.3 13.7 14.3Financials 2727.4 14.1 18.8 16.0 19.6 17.0 13.9 0.8 1.1 1.1 1.2 1.3 2.5 2.8 2.9 2.4 2.0 18.7 14.8 14.4 14.4Industrials 615.1 15.5 17.5 NA 17.3 17.9 15.7 1.8 1.4 1.1 1.9 2.0 1.2 2.7 3.1 1.8 1.5 3.5 17.8 9.9 9.9Materials 336.6 13.4 22.8 13.7 26.5 14.8 11.3 2.8 1.2 0.0 3.7 3.3 1.7 3.4 4.3 1.3 1.2 23.3 16.2 8.9 10.5Telecommunication services 1154.0 16.0 13.4 11.1 14.3 11.3 10.7 1.6 4.7 4.5 5.1 5.4 4.4 4.3 4.4 4.3 3.8 31.2 30.5 38.0 35.4Market Aggregate 34067 15.6 18.6 14.3 20.7 14.8 12.9 1.8 1.6 1.0 3.2 2.9 2.8 3.8 4.2 2.6 1.9 19.3 19.4 20.4 17.6

Value: PE Matrix for Countries and Sectors

12-month forward PE

Glo

bal

USA

Eur

ope

EM

EM

F E

ME

A

EM

F As

ia

EM

F La

tam

Bra

zil

Mex

ico

Chi

le

Arge

ntin

a

Per

u

Colo

mbi

a

Chi

na

Indi

a

Rus

sia

Sout

h A

frica

Kor

ea

Taiw

an

Mal

aysi

a

Turk

ey

Consumer Discretionary 13.4 14.4 11.3 12.3 13.0 15.8 9.8 11.0 15.8 26.4 NA NA NA 13.8 15.2 NA 13.0 10.8 17.4 13.7 9.7Consumer Staples 14.4 14.0 13.8 17.5 17.6 16.2 14.7 19.1 20.0 20.5 NA NA 29.1 16.1 24.3 26.8 15.3 13.5 18.7 15.1 21.0Energy 10.8 13.5 8.9 9.0 6.7 12.6 9.1 11.6 NA NA 11.4 NA NA 11.9 12.2 6.0 9.6 16.0 21.5 18.0 11.2Financials 10.9 12.3 9.1 11.0 10.0 11.3 8.9 10.7 16.0 12.9 8.6 NA NA 10.2 16.8 8.5 10.3 8.5 15.7 13.1 9.6Industrials 13.1 15.1 12.9 12.3 9.9 12.4 13.1 17.3 NA NA NA NA NA 11.1 19.9 NA 9.7 11.4 11.4 14.5 9.7Materials 11.2 14.5 10.2 10.5 10.6 12.4 7.3 7.7 13.7 NA NA 10.4 NA 12.8 10.1 9.9 11.9 12.1 12.9 14.7 10.7Telecommunication Services 12.0 15.3 10.2 11.4 11.3 11.6 9.0 9.1 11.1 11.8 9.3 NA NA 11.3 14.8 9.9 11.2 7.3 15.5 15.5 10.3Utilities 13.9 13.4 11.7 12.0 10.9 15.6 9.5 10.2 NA 13.6 0.0 NA 31.4 15.8 16.5 11.2 NA 37.2 NA 13.4 NAMarket Aggregate 12.0 11.7 7.4 11.2 9.1 12.0 11.7 10.6 14.3 16.2 8.8 9.8 17.1 11.6 15.9 8.0 11.2 10.7 12.4 14.1 10.5Sector Neutral* 11.9 13.6 10.8 11.2 10.5 12.8 9.8 11.7 13.6 13.3 11.1 11.5 12.9 13.2 15.9 10.9 11.3 12.2 15.5 14.5 11.3

Regional and Country Valuations

25-Apr-11 Avg. Current 12m Avg. Current Avg. CurrentMSCI Index 02-07 Trailing Fwd 2010E 2011E 2012E 02-07 Trailing 2010E 2011E 2012E 02-07 Trailing 2010E 2011E 2012E 2009 2010E 2011E 2012E

Mexico 34067 15.6 18.6 14.3 20.7 14.8 12.9 1.8 1.6 1.0 3.2 2.9 2.8 3.8 4.2 2.6 1.9 19.3 19.4 20.4 17.6Brazil 229862 11.4 11.7 10.6 12.1 10.9 9.8 3.8 3.1 3.0 3.4 3.8 2.0 1.8 1.8 1.7 1.7 18.7 16.5 14.9 15.9Chile 5556 25.2 17.0 16.2 17.1 16.8 14.8 2.3 3.7 4.1 2.7 3.1 1.9 2.1 2.1 2.1 1.9 13.3 7.7 12.2 12.8Argentina 229988 29.0 10.0 8.8 10.4 9.1 8.1 1.3 NA 2.2 NA NA 2.5 1.6 1.6 NA NA 21.5 21.5 NA NAColombia 2720 17.4 20.2 17.1 21.4 17.7 15.6 3.0 2.2 1.9 3.0 2.3 1.9 1.4 1.2 1.9 NA 11.4 5.8 5.4 10.6Peru 2661 15.2 26.2 9.8 10.9 9.7 10.0 3.8 2.8 2.6 3.5 4.3 3.2 3.9 4.1 3.4 NA 30.6 18.1 13.7 16.5EMF Latam 75022 13.7 13.4 11.7 13.9 12.1 10.7 2.9 2.6 2.4 3.3 3.6 2.2 2.1 2.1 1.9 1.7 18.5 16.3 15.4 15.9EMF Asia 699 14.6 13.9 12.0 14.6 12.6 10.9 2.3 2.5 2.5 2.6 2.9 2.0 2.0 2.1 1.9 1.7 13.2 15.4 16.1 16.8EMF EMEA 454 14.6 10.7 9.1 11.4 9.5 8.4 2.4 2.7 2.5 3.1 3.6 2.3 1.7 1.7 1.5 1.4 14.6 16.1 17.2 17.2Emerging Markets 48262 14.3 13.0 11.2 13.6 11.6 10.2 2.4 2.6 2.4 2.8 3.2 2.1 1.9 2.0 1.8 1.6 13.6 15.7 16.4 17.0China 71 16.1 13.3 11.6 13.9 12.1 10.5 2.3 2.6 2.5 2.8 3.2 2.4 2.2 2.3 2.0 1.8 15.4 17.4 17.5 18.0Russia 1074 12.7 9.4 8.0 9.9 8.2 7.4 1.8 1.5 1.4 1.8 2.1 1.8 1.4 1.5 1.3 1.2 13.4 15.9 16.8 16.5Korea 612 11.5 12.0 10.7 12.4 11.1 9.6 2.0 1.1 1.1 1.3 1.4 1.6 1.6 1.6 1.5 1.3 11.3 14.2 14.2 14.8Taiwan 308 24.7 14.2 12.4 14.8 13.0 11.1 3.0 3.5 3.2 4.1 4.6 2.0 1.9 2.0 1.8 1.7 7.8 13.8 14.7 16.2South Africa 814 14.3 14.2 11.2 15.6 11.7 10.0 3.0 3.1 2.9 3.6 4.4 2.6 2.5 2.6 2.1 1.9 15.0 17.5 20.0 19.8Global* 345 18.4 13.6 11.9 14.2 12.3 10.9 2.1 2.5 2.5 2.7 3.0 2.5 1.8 1.8 1.7 1.5 11.0 13.3 14.3 14.2USA* 1262 19.0 13.2 11.7 13.8 12.1 11.0 1.8 1.8 1.8 1.9 2.1 2.9 2.2 2.3 2.1 1.9 16.0 17.2 17.9 17.9Europe* 1193 16.4 8.3 7.4 8.6 7.6 7.1 2.9 3.6 3.5 3.8 4.2 2.3 1.6 1.6 1.6 1.4 17.3 19.5 21.0 21.1Japan* 524 19.4 15.0 13.6 26.1 14.0 12.9 1.1 2.2 2.1 2.4 2.5 1.8 1.0 1.0 1.0 0.9 0.0 8.7 7.1 7.2

Source: I/B/E/S, MSCI, JPMorgan. Updated as of Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. Companies with different yearends are calendarised to December yearends and are free float adjusted for aggregation. Historical numbers are from MSCI.

25 Apr 2011

ROE (%)

P/E (x)Prospective Prospective

P/BV (x) ROE (%)Prospective

Div. Yield (%)

P/E (x) Div. Yield (%) P/BV (x)Prospective Prospective Prospective

66



J.P. Morgan Stock Coverage

Name Ticker JPM Price Mkt Cap ADTV Coverging

Rating 25 Apr 11 $mn $mn 1d 1w 1m 3m YTD 11E 12E 11E 12E 11E 12E 11E 12E 11E 12E 11E 12E AnalystAmerica Movil SA AMX US OW 56.4 112,155 155 -0.4 -3.2 0.3 -2.8 -1.7 14.0 11.7 5.9 5.3 3.6 3.1 0.8 0.9 2.6 20.3 25.9 26.2 Baggio, AndreASUR ASURB MM OW 68.0 1,755 2 0.3 2.0 0.8 0.4 -2.8 17.9 16.3 8.3 7.5 1.4 1.4 4.1 4.5 10.1 9.7 17.4 18.1 Huerta, Adrian EAxtel SA de CV AXTELCPO MM UW 7.0 742 1 0.9 0.4 3.3 -2.0 -2.1 nm nm 5.3 5.1 1.2 1.4 0.0 0.0 nm nm -10.0 -11.4 Baggio, AndreCoca-Cola Femsa SA KOF US N 80.4 14,842 9 0.1 -1.5 1.7 -0.1 -2.5 12.9 12.4 7.5 6.4 2.2 2.0 2.0 2.3 4.5 4.0 14.6 14.8 Alanis, AlanComerci COMERUBC MM UW 19.2 1,794 2 0.1 -2.7 3.2 23.2 27.0 9.3 na 5.3 na 0.9 na na na 24.1 na 9.7 na Teixeira, AndreaCompartamos COMPARC* MM N 21.5 2,985 na 2.7 3.4 na na -20.0 16.3 13.9 - - 5.0 3.9 1.5 1.7 17.9 17.4 34.3 31.4 de Mariz, Frederic RozeiraConsorcio Ara ARA* MM UW 7.3 811 1 -0.3 -2.6 6.6 -7.1 -5.1 10.3 9.2 6.9 6.2 0.9 0.9 1.2 2.5 16.7 12.9 9.3 9.7 Huerta, Adrian EContal CONTAL* MM OW 43.0 2,774 2 -0.1 0.2 6.1 2.7 22.1 18.2 16.8 10.0 9.1 3.4 3.3 4.6 5.1 11.8 8.5 19.9 21.0 Alanis, AlanCorporacion Geo GEOB MM N 33.6 1,589 14 2.5 -1.1 3.9 -20.5 -25.8 10.7 9.1 5.9 5.4 1.6 1.4 0.0 0.0 12.6 18.5 16.4 16.5 Huerta, Adrian EEmbotelladoras Arca ARCA* MM OW 70.8 4,908 3 -0.3 -0.4 4.1 7.8 18.0 16.0 14.7 8.6 7.5 3.3 3.1 3.5 4.0 28.8 8.6 21.6 22.9 Alanis, AlanFEMSA FMX US OW 63.2 22,622 32 -0.6 3.4 7.3 13.7 13.1 13.7 12.3 8.2 6.6 1.5 1.3 1.5 2.1 13.8 11.3 9.7 9.8 Alanis, AlanFirst Cash Financial FCFS US OW 38.4 1,203 7 0.7 2.9 -3.4 14.6 23.8 17.4 15.4 9.9 8.7 3.2 2.6 na na 26.3 12.7 20.3 17.3 Laidler, BenGAP GAPB MM N 47.2 2,280 3 -1.3 0.0 -3.7 -2.0 -6.2 21.7 20.0 9.6 8.8 1.0 1.0 3.8 4.1 10.1 8.3 36.7 37.3 Huerta, Adrian EGrupo Bimbo BIMBOA MM N 25.3 10,251 4 0.7 -0.2 4.3 -0.9 -3.9 20.1 15.2 8.2 6.9 2.3 2.0 0.7 0.8 31.9 13.8 14.8 14.8 Alanis, AlanGrupo Financiero Inbursa GFINBURO MM UW 60.6 17,394 4 0.1 1.8 14.2 14.4 11.8 24.0 21.3 - - 2.8 2.5 1.5 1.7 8.1 12.6 11.9 12.4 Martinez, SaulGrupo Mexico GMEXICOB MM OW 38.7 25,944 59 -1.6 -5.6 -13.1 -18.6 -23.4 8.9 6.9 4.4 3.4 3.4 2.8 5.7 8.7 81.0 28.9 38.8 41.5 Angele, Rodolfo RGrupo Modelo GMODELOC MM OW 73.6 20,472 7 -1.4 -2.6 3.8 -2.0 -3.7 21.9 19.2 8.8 8.0 2.9 2.8 3.0 3.5 9.1 13.7 13.4 14.5 Alanis, AlanGrupo Televisa SA TV US N 23.4 13,691 58 0.0 4.2 -2.0 -2.1 -9.7 20.6 20.2 8.7 7.9 3.1 2.9 0.8 1.5 -4.5 1.7 15.2 14.1 Baggio, AndreHOMEX HOMEX* MM N 54.8 1,582 4 0.2 1.3 5.8 -16.9 -21.8 8.8 7.8 5.3 4.8 1.3 1.1 0.0 0.0 35.9 12.3 15.9 15.3 Huerta, Adrian EICA ICA* MM OW 28.0 1,549 7 0.6 1.9 5.1 -8.9 -11.4 18.9 20.9 5.4 5.4 0.9 0.9 0.0 0.0 38.3 -9.5 4.9 4.2 Huerta, Adrian EMegacable MEGACPO MM N 26.3 1,943 1 -2.7 -3.5 -6.6 -13.0 -17.9 13.4 11.9 13.2 12.0 3.5 3.4 0.0 3.7 0.0 13.8 12.9 14.4 Baggio, AndreNII Holdings Inc. NIHD US OW 41.0 6,952 77 0.4 3.5 0.8 -6.4 -8.3 16.3 16.4 5.3 5.3 1.9 1.7 0.0 0.0 26.6 -0.8 11.6 10.3 Baggio, AndreOMA OMAB MM UW 23.3 801 0 -1.7 1.4 6.0 -0.1 -1.4 19.0 17.8 7.8 7.2 1.2 1.2 4.2 4.5 6.0 6.5 16.6 17.1 Huerta, Adrian EOrganizacion Soriana SORIANAB MM UW 39.5 6,115 1 -0.4 0.4 -2.1 1.6 -0.4 19.2 17.9 9.7 9.0 1.9 1.7 0.4 0.4 13.2 7.3 10.2 9.9 Teixeira, AndreaSilver Wheaton SLW US OW 41.0 14,476 608 -3.1 -3.7 -6.3 32.2 5.1 19.5 19.1 16.3 15.4 4.7 3.7 0.0 0.0 181.3 1.9 24.8 20.1 Bridges, John DTelmex SA TMX US UW 18.4 16,567 20 -0.5 -0.5 5.1 6.8 14.0 14.0 14.7 5.9 6.2 4.4 4.7 4.7 5.2 -1.8 -4.8 33.8 34.4 Baggio, AndreTernium TX US OW 33.6 6,738 33 -0.2 2.0 -5.4 -19.6 -20.7 8.7 9.0 3.7 3.6 1.0 1.0 2.3 3.6 37.1 -2.6 12.3 10.7 Angele, Rodolfo RUrbi URBI* MM N 28.9 2,427 3 2.6 -2.0 7.2 -0.7 -0.4 12.0 10.2 6.5 5.6 1.6 1.4 0.0 0.0 25.0 18.3 14.0 14.4 Huerta, Adrian EWal-Mart de Mexico WALMEXV MM OW 35.8 55,036 41 1.1 1.8 3.7 3.1 1.1 26.9 22.5 15.9 13.3 4.7 4.2 1.1 1.1 20.9 20.3 18.8 19.6 Teixeira, AndreaMexico 372,399 1,159 16.9 14.7 8.5 7.5 3.3 2.9 1.6 2.1 21.1 14.7 21.0 21.3Source: J.P. Morgan Estimates, Bloomberg and Company Reports Updated as of 25 Apr 2011

% Price Change P/E EV/EBITDA P/BV Dividend YieldEPS Growth (%) ROE (%)

67



Mexico Market: Technical Indicators

Source: MSCI, IBES, Datastream, CEIC, Bloomberg, EPFR GlobalNote: Mexbol absolute and relative to MSCI EM is rebased to 100 since Jan 03.# Our Earnings Yield Gap model is defined as BY/EY. For Bond yield we take mexico 1 year cetes rates. Updated as of 25 Apr 2011

Mexico Fwd PE

M l i Th il d I d iT k P l d H

Mexico fair value range*

Phili iR i C h R bli ChilA ti 2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

Mexico Trailing PE Mexico Earnings GrowthMexico ROE vs Price to Book Value

(24301)

(18346)

(21523)

(25682)

(32554)

(28909)

(35196)

(42158)

15000 20000 25000 30000 35000 40000 45000

FWD PER

PER

PBR

DY

Mexico Performance

7

9

11

13

15

17

93 95 96 97 98 99 00 01 02 03 04 05 06 08 09 10 11

+1SD

-1SD

Avg

9

12

15

18

21

24

93 95 96 97 98 99 00 01 02 03 04 05 06 08 09 10 11

+1SD

-1SD

Avg

1.01.52.02.53.03.54.04.5

0

5

10

15

20

25

93 95 96 97 98 99 00 01 02 03 04 05 06 08 09 10 11ROE Price to Book

0

50

100

150

200

250

300

50

150

250

350

450

550

650

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Absolute relative to EM

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%

0

300

600

900

1200

1500

93 95 96 97 98 99 00 01 02 03 04 05 06 08 09 10 11Embig Spread Earnings Yield

Mexico Embig Spread vs Earnings Yield Moving Averages

-10.0-5.00.05.0

10.015.020.025.030.035.040.0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Mexico Yield Gap TREND in YG

Equities Cheap

Equities Expensive

De-Rating

Re-Rating

Mexico Yield Gap Model#

2000

3000

4000

5000

6000

7000

Jan 07 Sep 07 Jun 08 Feb 09 Nov 09 Jul 10 Apr 11

200 day 50 day Mexico 30 day

8090

100110120130140150160

Feb-10 May-10 Aug-10 Nov-10 Feb-11

2011

2012

68



Consensus EPS Revisions: Changes in 2011 and 2012 Forecasts

Updated as of Source: I/B/E/SNotes: The dashboard aims to show changes in earnings expectations. All year ends are for December .Charts have been rebased to 100 in Feb 2010

Apr 2011

AMX CemexBanorte

NIHD

Telmex


Coca Cola Femsa

Grupo MexicoFemsa

Urbi

Phili iR i C h R bli ChilA ti

Homex

2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

Televisa Walmex

85.0

90.0

95.0

100.0

105.0

110.0

115.0

Feb 10 Jun 10 Oct 10 Feb 11

2012

2011

80.0

90.0

100.0

110.0

120.0

130.0


2012

2011

0.020.040.060.080.0

100.0120.0140.0160.0180.0200.0


2012

2011

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0


2012

2011

90.0

100.0

110.0

120.0

130.0


2012

2011

80.0

95.0

110.0

125.0

140.0

155.0

170.0


2012

2011

65.070.075.080.085.090.095.0

100.0105.0


2012

2011

80.0

85.0

90.0

95.0

100.0

105.0

110.0


2012

2011

80.0

85.0

90.0

95.0

100.0

105.0


2012

2011

90.0

95.0

100.0

105.0

110.0

115.0


2012

2011

90.0

100.0

110.0

120.0

130.0


2012

201175.0

85.0

95.0

105.0

115.0

125.0

135.0

145.0


2012

2011

69



Value: Forward PE for Stocks

Updated as of Source: I/B/E/S, DatastreamNote: This Dashboard aims to show historic consensus forward PE with +/- 1 SD bands

Apr 2011

AMX Cemex Coca Cola Femsa

NIHD

Telmex


Banorte

Grupo MexicoFemsa

Urbi

Phili iR i C h R bli ChilA i

Homex

2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

Televisa Walmex

0

10

20

30

40

50

01 02 03 04 06 07 08 09 11

+1SD

-1SD0

3

6

9

12

15

18

96 97 98 99 01 02 03 04 06 07 08 09 11

+1SD

-1SD0369

1215182124

99 00 01 02 04 05 06 07 08 09 10

+1SD

-1SD5

10

15

20

25

30

35

40

96 97 98 99 01 02 03 04 06 07 08 09 11

+1SD

-1SD

6

9

12

15

18

21

98 99 01 02 03 04 06 07 08 09 11

+1SD

-1SD

048

121620242832

96 97 98 99 01 02 03 04 06 07 08 09 11

+1SD

-1SD 3

6

9

12

15

18

21

05 05 06 07 08 08 09 10 11

+1SD

-1SD

0

3

6

9

12

15

18

21

04 05 05 06 06 07 08 08 09 09 10 11

+1SD

-1SD

4

8

12

16

20

24

28

32

03 03 04 05 05 06 07 07 08 09 09 10 11

+1SD

-1SD

3

6

9

12

15

18

95 96 97 98 00 01 02 03 05 06 07 08 10 11

+1SD

-1SD

5101520253035404550

95 96 97 98 00 01 02 03 05 06 07 08 10 11

+1SD

-1SD

12

15

18

21

24

27

30

33

95 96 97 98 00 01 02 03 05 06 07 08 10 11

+1SD

-1SD

70



Value: Price to book value versus Return on equity

Updated as of Source: MSCI, DatastreamNote: This Dashboard aims to show historic trailing PB versus ROE. Blue Line shows ROE and Red Line shows Price to book Value

Apr 2011

AMX Cemex Coca Cola Femsa

NIHD

Telmex


Banorte

Grupo MexicoFemsa

Urbi


Homex

2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

Televisa Walmex

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

10

20

30

40

50

60

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

0.0

2.0

4.0

6.0

8.0

10.0

20

30

40

50

60

70

80

90

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

1.01.52.02.53.03.54.04.55.05.5

369

12151821242730

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

2.0

3.0

4.0

5.0

6.0

7.0

8.0

12

15

18

21

24

27

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

0.00.51.01.52.02.53.03.54.04.5

1013161922252831

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-6

0

6

12

18

24

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

1.01.52.02.53.03.54.04.55.0

510152025303540

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

1.2

1.5

1.8

2.1

2.4

2.7

3.0

8

10

12

14

16

18

01 02 03 04 05 06 07 08 09 10 11

P/BV

ROE

0.0

0.8

1.5

2.3

3.0

3.8

4.5

0

5

10

15

20

25

30

35

01 02 03 04 05 06 07 08 09 10 11P/

BV

ROE

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

9

12

15

18

21

24

06 07 07 08 09 09 10 11

P/BV

ROE

0.0

3.0

6.0

9.0

12.0

15.0

9

12

15

18

21

24

27

30

05 06 07 07 08 09 10 11

P/BV

ROE

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1011121314151617181920

05 06 07 07 08 09 10 11

P/BV

ROE

71



Dividend Yield

Company Name Period of

2010 2011 Dividend Payout 2010 2011Telmex 0.50 0.85 Quarterly 4.6% 7.7%Kimber 3.20 Quarterly 4.4% -OMA 1.00 0.98 Quarterly 4.3% 4.2%Contal 1.75 2.30 Annual 4.1% 5.4%GAP 1.78 1.78 Biannual 3.8% 3.8%ASUR 2.50 2.79 Annual 3.7% 4.1%Alsea 0.42 NA Annual 3.2% -GModelo 2.06 1.83 Annual 2.7% 2.4%Bolsa 0.68 Annual 2.7% -Arca 1.45 2.03 Annual 2.0% 2.8%Cmoctez 0.50 Annual 1.7% -GCarso 0.66 0.00 Biannual 1.6% 0.0%KOF 1.41 1.49 Annual 1.5% 1.6%Peñoles 5.10 Annual 1.2% -GMexico 0.48 0.09 Biannual 1.1% 0.2%Ara 0.08 0.17 Annual 1.1% 2.2%Comparto 0.90 Annual 1.1% -FEMSA 0.78 0.89 Annual 1.1% 1.2%Alfa 1.67 2.11 Biannual 1.0% 1.3%Walmex 0.35 0.02 Annual 1.0% 0.1%AMX 0.32 NA Biannual 0.9% -GFInbursa 0.55 0.90 Annual 0.9% 1.5%Banorte 0.32 Annual 0.5% -Bimbo 0.50 1.03 Annual 0.5% 1.0%Mexchem 0.22 0.00 Quarterly 0.5% 0.0%Soriana 0.19 0.14 Annual 0.5% 0.3%Elektra 1.60 Annual 0.3% -TVAZTCA 0.00 0.01 Annual 0.0% 0.1%Televisa 0.00 3.41 Annual 0.0% 6.3%

Simple Average 1.8% 2.3%*Excluding Cemex which paid 4% stock divided in 06.07.2010Source: Bloomberg, J.P. Morgan estimates and Bolsa Mexicana de Valores

Dividend Yield Dividend Yield: 2010 E

MSCI Mexico DY

DPS

0.8

1.2

1.6

2

2.4

2.8

3.2

3.6

95 97 98 99 00 01 02 03 04 05 06 07 08 10 11

+1SD

-1SD

Avg

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%6.0%

TelmexKimberOMAContalGAPASURAlseaGModeloBolsaArcaCmoctezGCarso KOFPeñolesGMexicoAraCompartoFEMS AAlfaW

almexAMXGFInbursaBanorteBimbo MexchemSorianaElektraTVAZTC ATelevisa

Mk Cap Average 1.29%

72



Key Economic Data

Updated as of Source: J.P. Morgan Economics, Bloomberg, Datastream, INEGI, Banxico. Red line Refers to forecasted numbers

Apr 2011

Real GDP (%oya) PMI (%oya) Imports Breakdown

Real Wage Growth (%oya)

Producer Confidence (%oya)


IP (%oya)

Unemployment RateExports Breakdown

Mexican Peso (MXN)

Phili iR i C h R bli ChilA i

Consumer Confidence (%oya)

2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

CPI (%oya) PPI (%oya)

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

04 06 07 08 10 11 12

J.P. Morgan

Consensus

J.P. Morgan forecast:end Jun11: 11.60end Sep 11: 11.80end Dec 11: 12.00

-12%-9%-6%-3%0%3%6%9%

12%

90 94 99 03 08 12

0%5%

10%15%20%25%30%35%40%45%50%55%

90 94 99 03 08 12

-15%

-10%

-5%

0%

5%

10%

15%

90 94 99 03 08 12

0%

10%

20%

30%

40%

50%

60%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 11

0%1%2%3%4%5%6%7%8%9%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 11

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

-25%-20%-15%-10%-5%0%5%

10%15%20%

02 03 04 06 07 08 09 11

-40%-30%-20%-10%

0%10%20%30%40%50%

Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

-60%

-30%

0%

30%

60%

90%

120%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 11

Capital IntermediateConsumer

-80%

-40%

0%

40%

80%

120%

160%

200%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 11

Oil Non Oil Agriculture

-25.0%-20.0%-15.0%-10.0%

-5.0%0.0%5.0%

10.0%15.0%20.0%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 11

73



Economic Forecasts Table

Mexico Avg* 2009 2010 2011F 2012F US 2008 2009 2010 2011F 2012FReal GDP, US$ Bn 8,452 8,399 8,861 9,259 9,583 Gross domestic product

Nominal GDP, US$ BN 938 883 1,040 1,202 1,279 Real GDP (% ch saar) 1.3 -2.6 2.9 2.9 2.9

GDP per capita - US$ 8,801 8,057 9,397 10,754 11,329 Final sales 1.6 -2.1 1.4 2.9 3.0

Real GDP, % change 3.4 -6.1 5.4 4.5 3.5 Domestic 0.1 -3.1 1.9 2.7 3.1

Contribution to growth of GDP. Consumer spending 0.3 -1.2 1.7 2.9 2.7

Consumption 3.1 -4.6 4.3 3.6 2.5 Business investment 2.4 -17.1 5.7 8.2 9.7

Investment 0.9 -3.7 2.3 1.5 0.5 Equipment -1.5 -15.3 15.3 10.1 9.6

Net trade -0.6 2.2 -1.2 -0.6 0.5 Structures 10.8 -20.4 -13.7 2.3 9.6

Consumer prices, % oya 4.3 5.3 4.1 3.5 3.3 Residential investment -21.3 -22.9 -3.0 1.4 12.5

% Dec/Dec 4.6 3.6 4.4 3.7 3.5 Government 2.9 1.6 1.0 -0.5 -0.6

Producer prices, % oya 5.4 4.9 3.7 4.5 4.1 Exports (% ch saar) 8.5 -9.5 11.7 10.1 8.5

Government balance, % of GDP -1.5 -0.5 -1.1 -2.4 -2.0 Imports (% ch saar) -2.3 -13.8 12.6 7.3 8.1

Industrial production index, 1993=100, average 1,498 1,397 1,535 1,597 1,662 Contribution to real GDP growth (% pts):

Unemployment rate, percent of labor force 3.6 4.8 4.9 3.9 3.5 Domestic final sales 0.1 -3.2 1.9 2.7 3.1

Exchange rate, units/$, eop 11.5 13.1 12.3 12.0 11.5 Net exports 1.5 1.0 -0.4 0.2 -0.1

Merchandise trade balance (US$ bn) -10.0 -4.6 -3.1 -10.9 -18.0 Inventories -0.3 -0.6 1.4 0.0 0.0

Exports 243.1 229.8 298.4 325.2 349.1 Consumer Price Index 4.1 -0.3 1.6 2.8 1.6

Imports 253.0 234.4 301.5 336.1 367.0 Core 2.4 1.7 1.0 1.2 1.0

Current account balance -8.0 -6.3 -5.7 -14.6 -20.4 Producer Price Index 7.4 -2.5 4.2 5.1 1.4

% of GDP -0.8 -0.7 -0.5 -1.2 -1.6 Core 3.3 2.6 1.2 2.0 1.1

Productivity 2.5 -11.4 0.1 -0.8 1.9

International reserves, (US$ bn) 72.3 90.8 111.8 123.8 132.8 Housing starts (mn units, saar)1 0.9 0.6 0.6 0.6 0.8

Total external debt, (US$ bn) 180.6 195.7 210.7 217.7 218.7 Industrial production, mfg. -1.5 -11.1 6.0 5.6 3.7

Short term 38.5 38.1 58.1 65.1 66.1 Capacity utilization, mfg. (% )1 76.7 67.2 71.7 75.3 76.9

Total external debt, % of GDP 19.0 22.0 20.0 18.0 17.0 Light vehicle sales (mn units, saar)1 13.3 10.4 11.5 13.2 13.3

Total external debt, % of exports 61.0 73.0 60.0 57.0 55.0 Unemployment rate1 5.7 9.3 9.6 8.7 8.4

Interest payments, % of exports 5.0 4.0 4.0 4.0 3.0 Nominal GDP 3.6 -1.7 3.8 4.1 4.1

Current account balance ($bn)1 -643 -378 -470 -554 -578

% of GDP -4.5 -2.7 -3.2 -3.6 -3.6

Federal budget balance ($bn) 1 -455 -1,416 -1,294 -1,500 -1,100

% of GDP -3.2 -10.0 -8.8 -9.8 -6.9Note: Exports of goods, services, and net transfers. * Avg is from 2004-08Source: J.P. Morgan Economics

Note: Debt with original maturity of less than one year

Th il dP l d

74



Financial Sector

Updated as of Source: J.P. Morgan, Bloomberg, Datastream, Banxico, INEGI

Apr 2011

Cetes Rates M1 Money Supply (%oya) M3 Money Supply (%oya)

Delinquency Rates (%oya)

Cost of Deposit (%oya)


Change in Monetary Base (%oya)

Deposit Growth (%oya)Real Credit Growth (%oya)


Total Deposits of Comercial Banking, Mxp bn

2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

Total Loan Growth (%oya)CD Rates

01020304050607080

93 94 96 97 99 00 02 03 05 06 08 09 11

91 Days Cetes Rates

28 days cetes Rates

0%

10%

20%

30%

40%

50%

60%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 11-40%-20%

0%20%40%60%80%

100%120%140%160%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 110%

10%

20%

30%

40%

50%

60%

90 91 93 94 96 97 99 00 02 03 05 06 08 09 11

-25%

-15%

-5%

5%

15%

25%

35%

45%

98 99 00 01 02 03 04 05 06 07 08 09 11-25%

-15%

-5%

5%

15%

25%

35%

01 03 04 05 06 08 09 10

Short term Long TermTotal

0%

10%

20%

30%

40%

50%

94 95 96 97 98 99 00 01 02 03 04 05 05 06 07 08 09 10

Consumer

Housing

Corporate

Loan Growth Composition (%oya)

01020304050607080

90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 090

10

20

30

40

50

60

90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09 11-40%

-20%

0%

20%

40%

60%

96 96 97 98 99 00 01 01 02 03 04 05 06 06 07 08 09 10 11-60%-40%-20%

0%20%40%60%80%

100%120%

96 96 97 98 99 00 01 01 02 03 04 05 06 06 07 08 09 10 11

Consumer HousingCorporate

0.15

0.16

0.17

0.18

0.19

0.20

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

75



Consumer and Telecom Sector

Updated as of Source: J.P. Morgan,Bloomberg, Antad, INEGI, COFETEL,Sociedad Hipotecaria Federal

Apr 2011

Retail Sales Index (%oya) Car Sales (%oya) Motor Vehicle Production (%oya)

Total Mortgages in 2009 (Bn)

Mortgage loans by banks (Ps bn)


Antad Sales (%oya)

Workers Remittances USD MM (%oya)General Economic Activity Index (%oya)


Productivity Index (%oya)

2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

Fixed Lines Growth (%oya)Mobile Subscriber Growth (%oya)

-10%

-5%

0%

5%

10%

15%

02 03 04 05 06 07 08 09 10-6%-3%0%3%6%9%

12%15%18%21%24%

Jan 06 Nov 06 Sep 07 Jul 08 May 09 Mar 10 Jan 11

All Stores Supermarkets

-100%-75%-50%-25%

0%25%50%75%

100%125%

91 92 93 94 96 97 98 99 01 02 03 04 06 07 08 09 11

-75%-50%-25%

0%25%50%75%

100%125%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

04 04 05 05 06 06 07 07 08 08 09 09 10 10 11

Tertiary Secondary IGAE

-40%

-20%

0%

20%

40%

60%

80%

96 97 98 99 01 02 03 04 06 07 08 09 11-9%-6%-3%0%3%6%9%

12%15%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Cable TV and Satellite TV Growth (%oya)

-20%0%

20%40%60%80%

100%120%

Mar-00 Sep-03 Mar-07 Sep-10

Satellite Cable TV

0%

20%

40%

60%

80%

100%

120%

140%

160%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Minutes Users

-9%-6%-3%0%3%6%9%

12%15%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

447

100143

48 46

075

150225300375450525

Infonavit Fovissste Banks / Sofoles

Others SHF

124151

127152

175201

0

50

100

150

200

250

2007 2008 2009 2010e 2011e 2012e

76



Fund Flows

Pension Fund Flows- March 2011 Survey of key EM managers positioning relative to MSCI EM – For major EMsMXN (bn) Exposure1 Country > 2% OW < 2% UW OW-UW < 0.1% EM % JPM

reco% bn Russia 20 (16) 10 (11) 10 (5) 3 (3) 7.3 N

Total investments 1395 100.0 0.9 12.3 Mexico 10 (9) 7 (6) 3 (3) 3 (3) 4.5 UW

Government Securities 823 59.0 1.3 10.3 Brazil 12 (7) 10 (7) 2 (0) 0 (0) 16 N

Bonds (Government bonos) 295 21.2 -0.7 -1.9 Indonesia 7 (7) 7 (5) 0 (2) 6 (5) 2.3 OW

Cetes (Treasury bills) 75 5.4 -1.8 -1.4 China+HK 8 (12) 17 (13) -9 (-1) 0 (0) 17.7 N

Inflation-indexed bonds 276 19.8 2.3 6.1 India 5 (8) 14 (10) -9 (-2) 1 (1) 7.4 OW

Non-government securities 323 23.2 -0.1 -0.5 Korea 10 (9) 21 (17) -11 (-8) 1 (1) 13.5 UW

Total equities 249 17.8 1.0 2.4 South Africa 6 (4) 17 (18) -11 (-14) 2 (2) 7.4 N

Mexico equities 116 8.3 1.1 1.2 Malaysia 0 (0) 13 (15) -13 (-15) 11 (10) 2.9 OW

International equities 133 9.5 0.9 1.2 China 3 (5) 23 (21) -20 (-16) 0 (0) 17.7 N

Taiwan 3 (3) 34 (30) -31 (-27) 1 (1) 11.5 N

1.Percentage of total net assets under management plus accountable commissions; used to se the investment regime limits Source: EPFR Global, MSCI, J.P. Morgan calculations

Source: CONSAR

Mexico Monthly Net Foreign Investment into Mexican Stock Market Mutual Fund AUM and% share of Equity

Source: MSCI, Datastream, EPFR Global Source: Asociacion Mexicana de Intermediarios Bursatiles

chg m/m

5,000

10,000

15,000

20,000

25,000

30,000

35,000

(1,400)

(1,050)

(700)

(350)

0

350

700

00 01 03 04 05 06 08 09 10Foreigners' Net Buy (L) MSCI Mexico (R)

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

20000

40000

60000

80000

100000

120000

140000

Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10AUM (billions pesos) % share in equity

77



Others

Source: J.P. Morgan, PEMEX, INEGI. The Blue line shows the Production numbers and Brown Line Growth (% oya)

Updated as of Apr 2011

Crude Production Cement Production Index Steel Production Index

Passenger Travel Growth (%oya)


Natural Gas Production

Cement Price IndexGasoline Price (MXP/LTS)


Steel Price Index

2004 2005 20042005 20042005 202005 220052004 2005 20042005 20042005 2004 2005 20042005I l 200420052004 2005

-30%-20%-10%0%10%20%30%40%50%

1700

2000

2300

2600

2900

3200

3500

3800

96 98 00 02 04 06 08 10

Gro

wth

(%oy

a)

Prod

uctio

n (0

00 b

bl's

)

Production % oya

-40%-30%-20%-10%0%10%20%30%40%

50

70

90

110

130

150

95 96 97 98 00 01 02 03 05 06 07 08 10

Gro

wth

(%oy

a)

Prod

uctio

n In

dex

Production Index % oya

123456789

10

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-60.0%

-20.0%

20.0%

60.0%

100.0%

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

International Domestic

-30%

0%

30%

60%

60

90

120

150

180

210

06 06 07 08 09

Gro

wth

(%oy

a)

Prod

uctio

n In

dex

Steel Index % oya

-30%-20%-10%0%10%20%30%40%50%

7580859095

100105110115120125

95 96 97 98 00 01 02 03 05 06 07 08 10

Gro

wth

(%oy

a)

Pric

e In

dex

Cement Index % oya

-40%

-20%

0%

20%

40%

80

95

110

125

140

155

06 06 07 07 08 08 09 09

Gro

wth

(%oy

a)

Pric

e In

dex

Steel Index % oya

-10%-5%0%5%10%15%20%25%30%

3000

4000

5000

6000

7000

8000

96 97 99 01 03 04 06 08 10

Gro

wth

(%oy

a)

Prod

uctio

n (0

00 b

bl's

)

Production % oya

78



79



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Conflict of Interest:

This research contains the views, opinions and recommendations of J.P. Morgan credit research analysts. Research analysts routinely consult with J.P. Morgan trading desk personnel in formulating views, opinions and recommendations in preparing research. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s). Therefore, this research may not be independent from the proprietary interests of J.P. Morgan trading desks which may conflict with your interests. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, trading desk and firm revenues and competitive factors. As a general matter, J.P. Morgan and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in research reports.

Important Disclosures

• Market Maker: JPMS makes a market in the stock of First Cash Financial. • Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for America

Movil SA, First Cash Financial, Kansas City Southern within the past 12 months. • Client of the Firm: America Movil SA is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to

the company investment banking services, non-investment banking securities-related service and non-securities-related services. First Cash Financial is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Kansas City Southern is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services and non-securities-related services. Wal-Mart de Mexico is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service.

• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services from America Movil SA, First Cash Financial, Kansas City Southern.

• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from America Movil SA, First Cash Financial, Kansas City Southern.

• Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other than investment banking from America Movil SA, First Cash Financial, Wal-Mart de Mexico. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from America Movil SA, First Cash Financial, Kansas City Southern, Wal-Mart de Mexico.

• MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.

80



0

19

38

57

76

95

114

Price($)

Oct06

Jul07

Apr08

Jan09

Oct09

Jul10

Apr11

America Movil SA (AMX) Price Chart

OW $36 N $32 OW $58 OW $72

OW $76 OW $58 N $34OW $47 OW $62

OW $55OW $59 OW $88 OW $70 OW $41 OW $37 OW $61 OW $69OW $66

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

Price Target ($)

27-Nov-06 OW 42.97 55.00 04-Apr-07 OW 50.00 59.00 27-Jun-07 OW 60.20 76.00 10-Dec-07 OW 64.13 88.00 14-May-08 OW 56.90 70.00 25-Jul-08 OW 47.87 58.00 30-Oct-08 OW 31.58 36.00 10-Dec-08 OW 31.23 41.00 18-Feb-09 N 28.31 34.00 01-Apr-09 N 27.08 32.00 29-Apr-09 OW 33.88 37.00 20-May-09 OW 37.79 47.00 24-Aug-09 OW 46.90 58.00 14-Jan-10 OW 47.60 61.00 07-Apr-10 OW 51.72 62.00 08-Jul-10 OW 49.39 72.00 03-Dec-10 OW 57.26 69.00 15-Mar-11 OW 54.54 66.00

0

14

28

42

56

70

Price($)

Nov06

Aug07

May08

Feb09

Nov09

Aug10

First Cash Financial (FCFS) Price Chart

OW $41

OW $36

OW $26.5OW $28.5 OW $34.5

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Dec 04, 2009. This chart shows J.P. Morgan's continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.


Price Target ($)

04-Dec-09 OW 21.24 26.50 21-Apr-10 OW 23.52 28.50 20-Oct-10 OW 29.64 34.50 26-Jan-11 OW 33.50 36.00 14-Mar-11 OW 35.36 41.00

81



0

18

36

54

72

90

Price($)

Oct06

Jul07

Apr08

Jan09

Oct09

Jul10

Apr11

Kansas City Southern (KSU) Price Chart

OW $48OW $54 OW $6

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Jun 25, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.


Price Target ($)

25-Jun-10 OW 38.12 48.00 26-Oct-10 OW 43.37 54.00 21-Apr-11 OW 53.41 62.00

0

12

24

36

48

60

Price(Ps)

Apr07

Jan08

Oct08

Jul09

Apr10

Jan11

Wal-Mart de Mexico (WALMEXV.MX) Price Chart

OW Ps17.5

OW Ps21

N N Ps24 N Ps25OW Ps21.05 N Ps21.5 N Ps28 N Ps35.5 OW Ps40

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Feb 08, 2002 - Sep 27, 2002, and Oct 30, 2003 - Oct 06, 2005. This chart shows J.P. Morgan'scontinuing coverage of this stock; the current analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (Ps)

Price Target (Ps)

25-Apr-07 N 23.36 -- 24-Nov-07 N 19.26 24.00 13-Jun-08 N 21.21 25.00 13-Oct-08 OW 16.87 21.05 13-Nov-08 OW 15.34 21.00 12-Feb-09 OW 14.63 17.50 05-May-09 N 19.97 21.50 09-Oct-09 N 23.89 28.00 02-Mar-10 N 31.88 35.50 10-Nov-10 OW 33.95 40.00

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Ben Laidler: First Cash Financial (FCFS)

82



J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2011

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 11% IB clients* 50% 45% 33% JPMS Equity Research Coverage 43% 49% 8% IB clients* 70% 62% 56%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

Explanation of Credit Research Ratings: Ratings System: J.P. Morgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark), Neutral (over the next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or benchmark), and Underweight (over the next three months, the recommended risk position is expected to underperform the relevant index, sector, or benchmark). J.P. Morgan’s Emerging Market research uses a rating of Marketweight, which is equivalent to a Neutral rating.

Valuation & Methodology: In J.P. Morgan’s credit research, we assign a rating to each issuer (Overweight, Underweight or Neutral) based on our credit view of the issuer and the relative value of its securities, taking into account the ratings assigned to the issuer by credit rating agencies and the market prices for the issuer’s securities. Our credit view of an issuer is based upon our opinion as to whether the issuer will be able service its debt obligations when they become due and payable. We assess this by analyzing, among other things, the issuer’s credit position using standard credit ratios such as cash flow to debt and fixed charge coverage (including and excluding capital investment). We also analyze the issuer’s ability to generate cash flow by reviewing standard operational measures for comparable companies in the sector, such as revenue and earnings growth rates, margins, and the composition of the issuer’s balance sheet relative to the operational leverage in its business.

Analysts’ Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities, Fixed Income, and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf.

Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock

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Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB010675237/INB010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 025/01/2011 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. 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In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. 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Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised January 8, 2010.

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.#$J&098$#*P

mexico 101 (2011 report)

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