Pichardo Asset Management Independent Portfolio Management Firm The Mexico Equity and Income Fund Inc. Material Presentation to Shareholders December, 2017 Experience 1 Consistency Vision
THE MEXICO EQUITY AND INCOME FUND, INC. Quarterly Board of Directors’ Meeting December 07, 2017 Index I. Summary ……………………………………………………………………………………………… 3 -4 II. Review of the Mexican Economy …………………………………………………..………………... 5 -22 III. The Composition of the Fund´s Portfolio: i. Investment Themes …………………………………………………………………….………. 23 ii. MXE´s Portfolio Upside Potential for the next 12 months & Forward Valuation ………… 24 -26 iii. Overweight / Underweight by Sector & Industry …………………………………...…….. 27 -28 iv. Diversified Active Management ……………………………………………….……….………. 29 IV. The Fund´ s Performance ……………………………..……………………………….…………… 30 -41 V. Definitions …………………………………………………………………………….…….………… 42 VI. Disclosures ………………………………………………………………………………..……….. 43 -45 2
I. Summary • World growth continued to trend higher in 3Q17. In Mexico, the risks to growth are weighted towards the downside due to uncertainty associated with the NAFTA renegotiation, which has been keeping a temporary lid on investment and could be one of the reasons for consumption slack. Meanwhile the peso lost ground against the dollar during the month due to U.S. monetary policy normalization, uncertainty over NAFTA, and the White House bill on U.S. fiscal reform. In this context, monetary policy actions aimed at preserving macro fundamentals remain in place. Given uncertainty over the NAFTA renegotiation and political noise related to the 2018 • elections in Mexico, we have been disciplined with respect to fundamental analysis, focusing our strategies on value stocks with attractive discounts, high earnings growth potential and attractive next-12-month upside as calculated by PAM based on fundamentals that remain quite strong. Experience 3 Consistency Vision
I. Summary • PAM’s disciplined adherence to maintaining positions in so-called discounted-oversold stocks, has contributed to the Mexico Equity and Income Fund’s (Fund) Net Asset U.S. Dollar Value per share, “NAV,” registering a 14.68% return for the Fund’s year-to-date period ended November 30, 2017, according to U.S. Bancorp. • The Fund’s long-term investment strategy has continued to provide an excess dollar annual return for the last five-years (476 bps per annum) and ten-year (100 bps per annum) periods, and since the Fund’s inception (212 bps per annum) in August 1990, through November 30, 2017 (with dividends reinvested) compared to the Mexican Bolsa Index’s return. Source: PAM; Bloomberg. Our base-case scenario is that NAFTA will prevail. As local content accounts for 80% of all • Mexican exports to the U.S. and 42% would have to comply with World Trade Organization rules, the post-NAFTA tariff would be a relatively low 3% and would ultimately be passed on to US consumers. Indeed, the US industrial lobbyists have already raised concerns about being adversely impacted by NAFTA’s cancellation. Source: PAM; Bloomberg. Experience 4 Consistency Vision
II. Review of the Mexican Economy Mexico vs. Developed Economies (G7) General Government Gross Debt Debt Coverage Ratio % GDP (% of GDP) (International Reserves/Government Gross Debt) 3.5x 250 2016 2017 (Estimate) 2.9x 3.0x 200 2.5x 150 2.0x 1.5x 100 1.1x 58 0.8x 53 1.0x 0.7x 0.6x 0.6x 0.6x 50 0.5x 0.5x 0.2x 0 0.0x Source: International Monetary Fund, International Financial Statistics (October 2017) Source: International Monetary Fund, World Economic Outlook Database (October 2017) Current Account Ratio 1 Current Account USD (International Reserves/Current Account Balance) Billion 10.0x 250 8.8x 9.0x 2016 150 8.0x 50 7.0x 5.5x 6.0x -50 -20 5.0x -150 -23 4.0x -250 3.0x 1.6x 1.5x -350 2.0x 0.9x 1.0x -450 0.0x -550 Source: International Monetary Fund, International Financial Statistics (October 2017) Source: International Monetary Fund, World Economic Outlook Database (October 2017) 1 Excluding countries: with surplus: Japan, Italy, Spain, and Germany Experience 5 Consistency Vision
II. Review of the Mexican Economy Mexico vs. Developed Economies (G7) Inflation Central Bank Rates % Inflation 7% 8.00% 7.00% 5.9% 2016 2017 (Estimate) 6% 7.00% 6.00% 5% 5.00% 4.00% 4% 3.00% 2.8% 3% 2.00% 1.00% 2% 0.00% -1.00% 1% 0% -1% Source: Bloomberg Source: International Monetary Fund, World Economic Outlook Database (October 2017) 5 Year CDS USD Currency Appreciation vs. USD (Basis Points) 15.00% 2016 YTD 7.67% 140 10.00% 123 112 120 5.00% 100 0.00% 70 80 -5.00% 60 -10.00% 40 24 18 10 20 -15.00% 0 -16.72% -20.00% Source: Bloomberg Source: Bloomberg Experience 6 Consistency Vision
II. Review of the Mexican Economy Mexico vs. Developed Economies (G7) Foreign Portfolio Investment Foreign Direct Investment USD USD Billion Billion 12,000 9,000 2016 2017 2016 2017 8,000 10,000 7,000 8,000 6,000 5,000 6,000 4,000 4,000 3,000 2,000 2,000 253 1,000 6667 232 0 0 Source: International Monetary Fund, International Financial Statistics Source: International Monetary Fund, International Financial Statistics Stock Market P/E Stock Market Return vs. Currency Appreciation 1 30.0x (2009-2017) 23.2x 25.0x 2016 YTD Stork Market Return Currency Appreciation 35% 18.9x 20.0x 30% 25% 15.0x 16.2% 20% 15% 10.0x 10% 5% 5.0x 0% 0.0x -5% -3.2% Source: Bloomberg Source: Bloomberg 1 Average Annual Holding Period Return/Appreciation Experience 7 Consistency Vision
II. Review of the Mexican Economy Mexico vs. LATAM Economies Annual GDP Growth Size of the Economy USD % Growth Billion 4.0% 2,500 2016 2017 (Estimate) 3.0% 2016 2017 (Estimate) 2.3% 2.1% 2,000 2.0% 1.0% 1,500 1,142 0.0% 1,047 1,000 -1.0% -2.0% 500 -3.0% 0 -4.0% Source: International Monetary Fund, World Economic Outlook Database (October 2017) Source: International Monetary Fund, World Economic Outlook Database (October 2017) Annual GDP per Capita International Reserves USD USD Billion 15,000 450 2016 2016 13,000 400 9,249 350 11,000 8,562 300 9,000 250 7,000 178 200 175 5,000 150 3,000 100 1,000 50 -1,000 0 Source: International Monetary Fund, World Economic Outlook Database (October 2017) Source: International Monetary Fund, International Financial Statistics (October 2017) Experience 8 Consistency Vision
II. Review of the Mexican Economy GDP, Employment & Inflation Growth Rate 1Q '17 2Q '17 GDP 3.2% 1.9% Private Consumption 3.1% 3.2% Government Consumption 1.8% 0.0% Investment -0.1% -3.1% Exports 9.0% 4.6% Imports 7.9% 5.3% *Constant Prices, Base 2013 Source: INEGI GDP (Million MXN) Growth Rates 2015 2016 1Q '17 2Q '17 2013 2014 2015 2016 Average GDP 17,288 17,791 4,440 4,536 1.4% 2.8% 3.3% 2.9% 3.1% Private Consumption 11,418 11,836 2,942 3,000 1.8% 2.1% 3.4% 3.7% 2.7% Government Consumption 2,082 2,131 531 536 0.5% 2.9% 1.9% 2.4% 1.9% Investment 3,743 3,784 907 912 -3.4% 3.1% 5.0% 1.1% 1.4% Exports 5,910 6,115 1,554 1,596 1.4% 7.0% 8.4% 3.5% 5.1% Imports -5,927 -6,099 -1,526 -1,600 2.1% 5.9% 5.9% 2.9% 4.2% *Constant Prices, Base 2013 Source: INEGI Experience 9 Consistency Vision
II. Review of the Mexican Economy GDP, Employment & Inflation Unemployment Rate Insured IMSS Workers 6.00 8.0% 20,000 (%) 19,000 6.0% 5.50 18,000 4.0% 17,000 5.00 16,000 2.0% 4.50 15,000 0.0% 14,000 4.00 13,000 -2.0% 3.60 12,000 3.50 -4.0% YoY Total Insured Workers 11,000 3.00 -6.0% 10,000 Source: Bloomberg Source: IMSS Same store sales (YoY) 15% Walmex 10.2% ANTAD 5.6% 10% 5% 0% -5% Experience 10 Consistency Vision
II. Review of the Mexican Economy GDP, Employment & Inflation Bi-weekly Inflation (YoY % Change) Inflation (YoY % Change) 9% Consumer Inflation Core Consumer Inflation Banxico Target Producer Inflation 8% 6.87% 7% 6.35% 6% 5% 4.80% 4% 3% 2% 1% 0% Source: INEGI Experience 11 Consistency Vision
II. Review of the Mexican Economy Private Banking Current Loans MXN MXN Commercial Loans Billion Billion (Sep 2017) (Sep 2017) $3,100 19% $4,500 17% YoY Current Loans $2,900 17% YoY Commercial 15% $4,000 $2,700 15% 13% $2,500 13% $3,500 11% $2,300 11% 9% $2,100 9% $3,000 $1,900 7% 7% $1,700 5% $2,500 5% Source: Mexico's National Banking and Securities Source: Mexico's National Banking and Securities Commission Commission Consumer Loans MX Housing Loans MXN Billion N (Sep 2017) (Sep 2017) Billio $700 25% n YoY YoY Consumption $700 15% $650 $650 20% 13% $600 $600 11% $550 15% $550 9% $500 $500 10% 7% $450 $450 $400 5% $400 5% Source: Mexico's National Banking and Securities Commission Source: Mexico's National Banking and Securities Experience 12 Consistency Vision
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