Brexit: process and consequences - three scenarios

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1 EMI and Franklin Templeton Investments Joint Collaboration Monthly perspective July 7, 2016 Brexit: process and consequences - three scenarios SUMMARY The referendum for Brexit, exit of the United Kingdom (UK) from the European Union (EU), has roiled financial markets, including Mexico. The Brexit process is very complex. It could last longer than two years or, a remote possibility, not occur. Economically, owing to the uncertainty, it is probable that, short term, Brexit is negative for UK and EU. Long term, consequences depend on the negotiation. Politically, Brexit could reflect a global trend. We provide three scenarios: positive 20%, negative 20%, middle 60%. For Mexico, until the whether and how of Brexit is clarified, there will be volatility, mostly negative for the peso and stocks, positive for bonds. The reason divorce is so expensive.is because it s really worth it Niall Ferguson. It is by far the most important event for our continent since the fall of the Berlin wall Marine le Pen. Brexit: referendum and markets On June , a popular referendum was held on whether the UK should remain in (Bremain) or leave (Brexit) the EU. Votes were 51.9% Brexit vs. 48.1% Bremain. The referendum was a pledge by David Cameron, Conservative party leader, in national elections which he won in May The date of the vote was decided in February 2016, when the referendum campaign began. Polls varied during the period, moving in Brexit s favor one week before the vote, and turning narrowly positive for Bremain two days before the vote. The surprise of the final vote had an immediate negative effect, followed by recovery in many markets (Figure 1). However, global rates stayed depressed. On June 27, S&P y Fitch lowered the UK s rating from AAA to AA. Subsequently, S&P lowered the EU rating from AA+ to AA. In this Perspective, we analyze the Brexit process, and provide scenarios for its long term economic, and political consequences, and foreseeable effects on markets in the short and medium term. 110 Figure 1. Stocks and interest rates 2016 (Jan-Jul1): Brexit effect. Source: Bloomberg Stocks (MSCI index US$ - base 100) 10 year interest rates (%) México Estados Unidos Reino Unido 2.5 Estados Unidos Reino Unido México 6.4 Base 100 (100=01 Ene BREXIT Tasa 10 años (Estados Unidos y Reino Unido) BREXIT Tasa 10 años (México) 80 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 0 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul

2 BREXIT: PROCESS Referendum A referendum is a process whereby a proposal is presented to the whole electorate, normally on matters fundamental to a country s future. It is a kind of direct democracy, termed plebiscite in ancient Rome. In the UK, parliament evolved, as a form of indirect, or representative, democracy, whereby the task of making decisions is delegated to a representative elected for a certain period, until the next election. In the UK, parliamentary sovereignty has become a sacred tradition and there have only been three referendums in the history of the Union (England, Scotland, Northern Ireland, and Wales). The first was on whether the UK should stay in the European Community in 1975, the second on the use of alternative votes in 2011, and the most recent, on Brexit, on June 23. The legal status of this referendum was a consultation. The sovereign parliament can decide to accept, or not, the people s recommendation implicit in the vote. As leader of the Bremain campaign, Cameron resigned on June 24, and set as a date for his successor s election some time before the Conservative party convention in October. His successor would be in charge of the Brexit negotiations. Referendum: validity There have been issues about the validity of the referendum result: The rule for the validity of the referendum was a minimum turnout of eligible voters of 75% with a mínimum majority of 60%. As the turnout was 72.2%, and majority 51.9%, a petition has been organized for parliament to approve a second referendum, with 4,120,212 signatures (on July 6), to be valid until November 25, More than a million signatories regret their vote ( Bregret or Regrexit ). Boris Johnson, leader of the Conservative Brexiteers, insinuated the possibility of a second referendum. Figure 2. Bremain and Brexit: MPs known voting intentions in UK (by party). Source: BBC There is a controversy about whether it is the government (through the prime minister), or parliament, which begins the Brexit procedure with the EU. Respected constitutionalists say, that, before beginning the procedure, a parliamentary vote is required to revoke the European Communities Act which was passed in 1972 to facilitate the UK joining the EU in 1973, because sovereignty rests with the Queen in parliament. Voting intentions of 637 out of 650 MPs (revealed a day before the referendum) were 479 Bremain, 158 Brexit (Figure 2). If these voting intentions remained unchanged, parliament would reject the referendum. According to other constitutionalists, the parliaments of Scotland and Northern Ireland have to approve Brexit. If this were true it would provide another mechanism for staying in EU, as the majority in each country voted Bremain (see Figure 3). Brexit procedure The withdrawal procedure from the EU is covered by article 50 of the EU constitution, which, according to the Treaty of Lisbon, came into force in None of the 28 member countries of the EU has withdrawn, and the only mechanism is voluntary, at the initiative of member countries. Withdrawal becomes effective after a maximum period of 2 years following notice of withdrawal. This period can be extended through the vote of a majority of EU members. The EU stated on June that it respected the UK s decision and requested that it proceed quickly. "We are ready to begin negotiations rapidly with the UK on the terms and conditions of its withdrawal from the EU. Until this process is completed, the UK remains a member of the EU, with corresponding rights and obligations. According to the treaties ratified by the UK, EU law continues to apply to the UK until it ceases to be a member. 2

3 UK: political situation Two processes could complicate the execution of the recommendation of the referendum: The election of Cameron s successor as prime minister. Deadline for this process is September 9, Boris Johnson resigned his candidacy on June 29. After the first round, the frontrunners are Theresa May, Home Secretary and Andrea Leadsom, Minister of Energy and Climate Change. An election is also probable for the leadership of the Labour Party, whose leader, Jeremy Corbyn, lost the confidence of his MPs owing to his weak performance in the referendum campaign. Nigel Farage, the leader of the third party, the UKIP (United Kingdom Independence Party), has also resigned. The new prime minister could ignore the referendum results, using the legal arguments referred in previous sections. Also, if there is no clear parliamentary majority, new general elections could be called, postponing a Brexit decision. Figure 3. Brexit referendum: results by UK district. Source: BBC Possible dissolution of United Kingdom. In England and Wales, the majority voted Brexit while all Scotland and the majority of Northern Ireland voted Bremain (see Figure 3). In Scotland, first minister Nicola Sturgeon announced on June 24 that her colleagues would plan another referendum on independence from the UK (after the most recent one in 2014). Manfred Weber, German leader of the European People s Party in the European parliament, and important ally of Angela Merkel, said that Scotland was welcome to stay in the European Union. Mariano Rajoy, prime minister of Spain, has spoken against Scottish separatism. In Northern Ireland, deputy prime minister Martin McGuinness of Sinn Féin requested a referendum on unification of Northern Ireland with the Republic of Ireland (a member of the EU), as a consequence of the Brexit vote. The negotiation There are four main parameters which define the relationship between UK and EU: 1. Trade. 2. Movement of people. 3. Involvement of EU in UK legislation and regulation. 4. Contributions by UK to EU. Of total world GDP (nominal US$) in 2014 (US$77.3 trn.), UK GDP (US$2.9 trn.) was 3.8%, 5 th largest in the world. As part of the EU, UK is a member of the world s largest economic unit, measured by GDP and trade (Figure 4). Since joining the EU in 1973 the UK has had a higher GDP per capita growth than its English-speaking peers (Figure 5). 3

4 Figure 4. Global GDP, population, trade, and land area (%) Figure 5. Increase (%) in GDP per capita Source: OECD In the Brexit campaign, the most important issues for the Brexiteers were the increase in unrestricted immigration to the UK (owing to EU laws), and EU involvement in UK legislation (Figures 6 and 7). The issue has always been whether this reduction of UK sovereignty has been compensated by economic growth. Figure 6. UK: net migration Source: Franklin Templeton Figure 7. Laws initiated by UK or EU.Source: Leave campaign If, as seems probable, it decides to follow the recommendation of the referendum, the UK will have to establish new trade relationships, both with the other 27 members of EU, and other countries around the world. As a member of EU, UK is included in the trade deals it has negotiated, 22 with specific countries, and 5 multilaterals deals with several countries. This implies that if the UK wants preferential access to the 52 countries covered by these agreements, it has to negotiate with each of them. Another complication is the issue of financial services, which in 2014 represented 8% of the UK economy (Figure 8). There is currently a passport system for financial institutions, whereby an institution can act as if it were domiciled in the 27 EU countries, without changing its main location. Brexit implies that this situation will have to change. Main financial centers that could compete with London (a historic financial center, where financial services are 18.6% of the economy) are Frankfurt, Paris, Amsterdam and London. 4

5 Figure 8. Proportion of Financial Services/ Gross Value Added. Source: House of Commons Library UK: Franklin Templeton Servicios OECD: de Asesoría selected countries México 2012 There are various models of countries which have different trade deals with the EU: Norway, Switzerland, Turkey, free trade agreements such as NAFTA or TPP (TransPacific Partnership), or the default option of membership of the WTO (World Trade Organization) (Figure 9). Norway is a member of the European Economic Area (EEA), which established free movement of people, goods, services and capital in 1994 and included members of the European Community (now EU) as well as 3 out of 4 members of the European Free Trade Association (EFTA), Norway, Liechtenstein and Iceland, with Switzerland staying out. The Norwegian model is most similar to the EU, with complete access to the Single Market in exchange for annual contributions to the EU and free movement of people. But Norway has no say in the formulation of EU laws and regulations. Figure 9. UK and EU: models of trade arrangements. Source: OECD The problem with the Norwegian model for the Brexiteers is that favorable trading relations implies precisely what they do not want, free movement of people, and EU legislation and regulation on which UK has no influence. The same occurs, with considerable complexity, and worse terms of trade (above all in financial services) with the other models. Meanwhile, it is obvious that the EU wishes to offer worse conditions than the current ones, in order to discourage withdrawal by the 27 remaining EU members. An area little noticed by the media (and which could intensify Bregret) is the UK s capacity to execute the Brexit negotiations (without taking account of the potential withdrawal from the UK of Scotland and Northern Ireland). The civil service has been cut by 20% since The UK has little capacity for trade negotiations as all this activity has been outsourced to the EU. Recent trade negotiations around the world have taken between 3 and 10 years (Figure 10). 5

6 Figure 10. Trade agreements: years of negotiation. Source: OECD It is not surprising that Theresa May, frontrunner in the Conservative elections has said that, if elected, the soonest she would expect to activate article 50 to initiate the Brexit procedure would be the end of It has also been mentioned that a special Brexit ministry would be created. BREXIT: CONSEQUENCES The Brexit referendum result affected global financial markets owing to an increase in the perception and reality of three kinds of risk: 1. Economic risk for UK, Europe and the world 2. Political risk, of separatism, in the UK, Europe and the world. 3. The risk of an increasing antiglobalization movement in the world. In this section we analyze the nature of these risks. Economic risk Figure 11. UK: effect of Brexit on economy and comparison with other recent studies. Source: OECD The OECD, in a full report, estimates that Brexit would be a strong shock to the UK economy, with consequences for EU and OECD countries. It sees it as a tax on UK GDP, which would not be levied with EU membership. The shock would be transmitted through various mechanisms over time. In the short term, the economy would be affected by tighter financial conditions and lower confidence, and, after the formal departure of the UK from the EU, higher trade barriers for goods and services, and restrictions on the free flow of labor. It estimates that by 2020 GDP would be -3.3% lower than with EU membership. Longer term, it estimates that reduction in inward capital flows, and immigration, and slower technical progress would have an effect. Specifically, productivity would be affected by the reduction in Foreign Direct Investment, and skilled labor. For 2030, its base estimate is that GDP would be -5.1% 6

7 lower than with EU membership. Even in the most optimistic scenario, the effect would be negative. There would also be an effect on the GDP of other European economies owing to uncertainty on the future of Europe. Studies by other organizations analyzed by the OECD reach the same conclusions (Figure 11). Political risk During the coming years, there will be important political events for countries accounting for 70% of EU GDP. In each country there are radical parties which could promote disruptive proposals, anti-trade and anti-migration (Figure 12). Figure 12. EU: political events Source: Franklin Templeton Date* Country Vote Radical party Tendency September 26, 2016 Spain Catalonia Podemos Left October, 2016 Italy Constitutional referendum 5 stars Left March, 2017 Netherlands General election Dutch Freedom Right April 23, 2017 France Presidential election (1st round) National Front Right May 7, 2017 France Presidential election (2nd round) National Front Right June, 2017 France Parliamentary election National Front Right September, 2017 Germany General election AfD Right May, 2018 Italy General election 5 stars Left *approximate, where relevant An analysis by country seems to indicate that is not likely that anti-eu proposals from radical parties will succeed, on legal and electoral grounds: Germany. The Alternative for Germany party (AfD) would like a Brexit-style referendum. A party member has said that next year AfD will reach the German parliament and Dexit will be of prime importance. However, the constitution only permits referendums on territorial and constitutional changes. It would be very difficult for AfD to get elected, and to change the constitution. France. The constitution permits referendums but they have to be proposed by the President, who has no intention of proposing one. For the 2017 elections, the only candidate who would propose a referendum is the candidate of the extreme right, Marine Le Pen. But she is unlikely to win. Italy. The constitution does not permit referendums on constitutional issues. In order to have a referendum the constitution must be changed. The 5 star party has abandoned the referendum idea, and wishes to change the EU from the inside. Spain. In the June 26 elections three days after the Brexit referendum, it was encouraging that the Podemos- Izquierda Unida Alliance actually lost votes, while the ruling PP actually gained votes, showing no contagion from Brexit. The government has to propose a referendum and the parliament has to support it. Podemos supports the EU, and the main risk for Spain are regional separatist movements within the country (e.g. Catalonia), not Europe. Netherlands. A proposal by the Dutch Freedom party for a referendum on EU membership was rejected by parliament with just 14 in favor out of a total 150. There is a law that referendums can only be held on laws that are being debated. This law could change but the Party would have to become the government and obtain a majority in parliament. As there is a system of proportional representation, it is unlikely that this would occur. However, given the Brexit phenomenon, it is impossible to discard apparently unimaginable scenarios, as has occurred at critical turning points in Europe (for example, the Fascists in Italy in the 1920s and the Nazis in Germany in the 1930s). Anti-globalization risk Kondratieff cycles This wave of anti-globalization trends, with the possible dissolution of the UK and EU is not limited to Europe. The Trump phenomenon in the US, is anti-migration, with his proposal to build a wall between the US and Mexico, and protectionist, with his proposal to revoke NAFTA and other trade agreements. The principal cause of this phenomenon is globalization, reasonably defined as the elimination of political and geographical barriers. Political barriers (mainly protectionism) fell with the collapse of the Berlin Wall in 1989, which symbolized the superiority of capitalism to socialism, and gave rise to a series of trade initiatives, such as the Treaty of Maastricht in 1992, which led to an expansion of the European Community, the introduction of the euro in 1999, and a current level of membership of 28 countries. In the Western hemisphere, this trend culminated with the implementation of NAFTA 7

8 in Geographical barriers (the death of distance) have been reduced through the explosion of TMT (Technology, Media and Telecoms), symbolized by the Internet. Globalization has given rise to a change in production and trade patterns, replacing workers in developed countries with robots, and cheaper labor in emerging markets. Hence the rise of radical parties and demagogues like Trump. There is a theory of economic cycles which explains these phenomena. Nicolai Kondratieff, a Russian economist ( ), developed a theory of cycles lasting years based on a) technological inventions b) opening up of new markets, and c) wars and revolutions, which he published in 1925 (Major Economic Cycles) 1. In long cycles, inventions are developed in the down phase, and applied in the up phase. In the up phase the total market increases through the inclusion of new markets. In the up phase, economies grow through this combination of technology and new markets, what we now call globalization. The economy then reaches a level when conflicts arise (through envy) within, and between, countries (wars). Kondratieff could only produce his theory based on data from the XVIII century to the beginning of the XX century. Subsequently, analysts have updated his cycles to the present time, and it is impossible to ignore the same globalizing factors, new technologies and markets, as the cause of current political trends (Figure 13). Figure 13. The long cycle: markets, inventions and wars. Source: Timothy Heyman, Mexico for the Global Investor, p.73. (Editorial Milenio, 1999). If we take this theory seriously, it would imply that the up cycle is nearing its end, the peak having been reached with the 2008 financial crisis, and could climax with political crises, within and between countries, in the coming years. Brexit and its consequences: three scenarios Taking into account the parameters and timeframes of the previous sections, we paint three scenarios (in relation to economic growth), with their corresponding probabilities. The probabilities reflect the difficulty of producing long term forecasts. But their objective is to stretch the imagination, necessary for any investor. Positive (20%) The election of the new Conservative prime minister occurs on time, in September. In the most remote case, the Brexit decision is reversed, and nothing changes much, except some revision of the migration agenda. Most probably, Article 50 of the Lisbon Treaty is activated, best case during 2016, and it is negotiated rapidly on the basis of the Norwegian model with certain migration adjustments. Scotland and Northern Ireland remain in the UK. In other European countries, separatist initiatives fail and radical parties begin to lose force. Europe and the UK recover energy and economic impetus: London reaffirms its status as a global financial center. The US learns from the European example. Trump loses the November elections, and Clinton maintains her predecessor s trade and migration policies. Short and medium term, uncertainty is reduced in financial markets, and global growth is higher 1 As he arrived at the conclusion that capitalism would not disappear after the 1929 crash, Stalin exiled him to Siberia, where he died in

9 in 2017 than in Stocks and emerging markets currencies rise, interest rates rise, and metals prices fall. Long term, the up cycle of the Kondratieff cycle continues, and doubts arise about whether the theory is applicable in a totally globalized world. Negative (20%) The election of the new Conservative prime minister is very tight. New general elections are called. All this process delays the Brexit negotiations, which after the new elections in 2017, is reconfirmed. Article 50 is activated in 2017 and the terms of Brexit take at least two years to negotiate. Scotland and Northern Ireland both leave the United Kingdom. Led by radical right and left wing parties, several countries leave the EU, which is dissolved. Europe enters recession, even depression: London loses its financial primacy to Frankfurt, Dublin, Amsterdam and Singapore. In the US, Trump wins the election and introduces protectionist and antimigration laws. In the short and medium terms, stocks and emerging currencies decline, interest rates fall further, and gold soars. Over the long term, the Kondratieff cycle seems to apply, and could end with political conflicts, revolutions, or local and international wars. Middle (60%) A moderate Conservative prime minister is chosen, but does not begin Brexit negotiations until Scotland leaves the UK (but Northern Ireland stays). Some members decide to leave the EU, which continues to exist, but with fewer members. Negotiation by the UK of a new agreement (on the Swiss model) takes two years, and London maintains its financial leadership. In the US, Trump wins the elections but moderates his more extreme positions. There is a recession in 2017, but the UK and European economies recover in Short term, stocks and emerging currencies fall, interest rates fall, and gold rises, but medium term these trends revert. Over the long term, the Kondratieff cycle appears valid, but it takes time to prove itself. México There have been two economic policy reactions to Brexit in Mexico: a small budget cut, in response to expected lower growth in the second semester of 2016, and a rate hike of 0.5% by Banco de Mexico, to strengthen the peso and reduce the risk of inflation. Like the rest of the world, the government will be monitoring closely the Brexit process and its consequences. Conclusion and short term scenarios Brexit is a short term blow to the UK and European economy. In the medium term, much depends on the negotiation, which may or may not encourage radical parties in Europe and anti-globalization trends. It is impossible to ignore the economic and geopolitical implications of the Kondratieff cycle. Short term we change our probabilities for the 2016 scenarios: positive 10% (from 20%), negative 50% (40%), medium 40% (40%). This implies high volatility, mostly negative for stocks and the peso, and positive for bonds, until the whether and how of Brexit is clarified. Timothy Heyman July 7,

10 Main financial indicators: monthly and YTD performance (June 30, 2016) In June 2016, in Mexico the IPC rose 1.12%. Nominal rates rose for short terms, and fell for medium and long terms. Real rates fell for all terms. The US$ strengthened 0.29% against the peso. In the US, the DJ and S&P500 rose, and Nasdaq fell. Nominal and real rates fell for all terms. The Mexican oil mix rose by 1.84% and WTI fell 1.57%. According to the Banxico business climate survey, optimism decreased to 13% (19% previous), no change fell to 56% (65%), and pessimism increased to 31% (16%). Mexico Stock market and oil IPC 45, , , % 6.95% Local currency (USD/MXN) % 7.04% Mexican oil mix (USD/bl) % 49.80% Nominal rates CETES % 3.80% 3.05% 45 bps 120 bps CETES % 4.40% 3.66% 3 bps 77 bps M5 5.46% 5.61% 5.55% -15 bps -9 bps M % 6.16% 6.23% -24 bps -31 bps M % 6.90% 6.95% -41 bps -46 bps Real rates UDIBONO % 3.21% 3.34% -38 bps -51 bps UDIBONO % 3.78% 3.91% -39 bps -52 bps Commodities Gold 1, , , % 24.58% WTI (USD/bl) % 30.48% UMS UMS 10 years 3.00% 3.31% 3.87% -31 bps -87 bps UMS 20 years 4.07% 4.59% 5.30% -52 bps -123 bps UMS 30 years 4.21% 4.72% 5.29% -51 bps -108 bps Stock markets (US$) MSCI Developed 6, , , % 1.02% MSCI Emerging 1, , , % 6.60% MSCI Mexico 8, , , % 0.97% MSCI Brazil 4, , , % 46.50% US Stock market DJ 17, , , % 2.90% S&P 2, , , % 2.69% Nasdaq 4, , , % -3.29% Nominal rates Tbill % 0.34% 0.16% -8 bps 10 bps Tnote % 1.37% 1.76% -36 bps -75 bps Tnote % 1.84% 2.27% -35 bps -78 bps Tbond % 2.64% 3.01% -34 bps -71 bps Real rates Tip % -0.10% 0.45% -27 bps -82 bps Tip % 0.30% 0.73% -21 bps -64 bps Tip % 0.91% 1.28% -21 bps -58 bps Bank of Mexico survey Indicator anterior PIB 2.36% 2.44% Inflation 3.10% 3.11% Cetes % 4.21% Local currency Business conditions 30-Jun May-16 Optimism 13% 19% No change 56% 65% Pessimism 31% 16% Source: Bloomberg, Banco de México 10

11 IMPORTANT LEGAL INFORMATION The material has been prepared by, S. de R.L. de C.V. ( FTSAM or the Company ) which has the folio inscription number (14127)-15/04/2016 in the Public Register of Investment Advisors assigned by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) in terms of the Securities Market Law (Ley del Mercado de Valores). Registry does not imply compliance with the regulations applicable to the services that are provided, nor the precision or veracity of the information provided. The content of this document is for information purposes only. Past Performance is not a guarantee of future returns. The material has been prepared by FTSAM solely for use in this document, and is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any kind. Nothing in this document should be construed as investment advice. This document may contain information obtained from various sources, and while it may be considered reliable, the Company makes no warranty or any statement on its fidelity, accuracy, scope or coverage, as the Company has not verified, validated or audited independently such information. The information is partial and, therefore, cannot be called complete. You agree to keep the contents of this document strictly private and confidential and it shall not be disclosed, copied, reproduced or redistributed (in whole or in part) to any person without the prior written consent of the Company. This document may contain "forward looking statements" and results may vary from those expressed or implied are included in this document. Such forward-looking statements can be identified, among other words, by the use of terminology such as "expect", "anticipate", "believe", "continue", "could", "estimate", "predict", "try" "plan", "predict", "should" or other forward-looking terminology, or by the negative of these words or comparable terminology, including without limitation the plural form of these words. All forward-looking statements relate to the Company's current expectation regarding future events and are subject to a number of factors that could cause actual results to differ materially from those in respect of the forward-looking statements. One must be cautious of such statements and should not place undue reliance on any forward-looking statements. This document includes no representation or warranty (express or implied) so it should not support the accuracy, fairness or completeness of the information presented or contained in this document. Neither the Company nor any of its affiliates, meployees, advisers or representatives accepts any liability for any loss or damage caused by the information presented or contained in this document. The information presented or contained in this document is current as of the date indicated and is subject to change without notice and its accuracy is not guaranteed. The information contained herein and the views, if any, expressed therein are issued on the date hereof and, therefore, are conditioned and / or subject to probable changes due to changes in applicable law, as well as the conditions and circumstances that may or may not be provided in this document, in addition to over time and other similar situations. Neither the Company, nor its affiliates, agents, employees or advisers assume any responsibility or obligation to inform you or any other person regarding any changes to the information or opinions expressed herein resulting from matters, circumstances or events that may arise in the future or that may be brought to our attention after the date herein. This document should not be construed as legal, tax, investment or any other type of advice. This document does not constitute an offer or invitation to purchase or subscribe shares or other securities and no part of this document or any information, opinion or statement contained herein shall be the basis of, or be referred to in connection with any contract or commitment. Any decision to purchase securities in any offering of securities should be made solely on the basis of information contained in the prospectus of the securities offered. By reading this document, you agree to be subject to the above limitations. Copyright Franklin Templeton Investments. All rights reserved. Valid only in the United States of Mexico. 11

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