CalPERS investment officer explains impact of British exit from EU
Britain’s vote to leave the European Union rattled international markets and the political world, sending the British pound plunging to its lowest level in decades and U.S. stocks sharply down.
In California – by recent figures the world’s sixth-largest economy – the exit threatened to hurt exports to the United Kingdom. The significance of the exit to the state economy was unclear. But before the vote, the Brown administration had classified the possibility as a risk.
“California has a lot at stake,” Allan Zaremberg, president of the California Chamber of Commerce, said in a prepared statement. “We are the sixth largest economy in the world and a major trading and investment state, and no one in California can be immune from dramatic changes in the international economic structure.”
Here are five potential financial impacts in the Golden State:
Despite California’s positive budget outlook in recent years, Gov. Jerry Brown and others have repeatedly warned of the state’s disproportionate reliance on volatile sources of income such as capital gains. If markets lose, the state figures to, as well.
In its economic outlook last month, the Brown administration included the potential of Britain leaving the EU in its “risks to consider.”
“Emerging market growth, including China, has been slowing and is expected to remain low,” the administration wrote. “There is also some uncertainty about the growth path in the European Union, particularly if Great Britain exits the union. Slower growth in one or both, or a change in U.S. fiscal policy, could dampen U.S. growth.”
H.D. Palmer, a spokesman for the governor’s Department of Finance, said in an email, “Like everyone else, we’ll be monitoring how this plays out in the weeks and months ahead.”
California Treasurer John Chiang predicted Friday that market turmoil triggered by the British vote will take time to unwind. But he predicted minimal impact on state debt obligations and an important but little-known investment fund his office manages for state and local governments.
“Market volatility could be sharp until many questions surrounding Brexit can be resolved over the coming two years,” Chiang said in a prepared statement. “My office is monitoring developments closely and will take appropriate actions to safeguard the state’s financial integrity.”
The United Kingdom is California’s 10th largest export market, just ahead of India and Singapore, and the state did more than $5 billion in exports to the United Kingdom last year.
But if the British pound remains weak after its nosedive on Friday – and if the U.S. dollar remains strong – U.S. exports could suffer.
A strong dollar makes U.S. goods more expensive to purchase by trading partners abroad.
“In terms of impact on California, it’s not good news for California exporters who have markets in the EU or the U.K., since both those currencies have taken a hit in the last 24 hours,” said Jock O’Connell, a Sacramento-based international trade economist. “If they remain at those current levels, it’s going to be more expensive to export our products.”
Tim Johnson, president and CEO of the Sacramento-based California Rice Commission, said a strengthening of the dollar could cut into California commodity exports, which have already been struggling overseas.
“It affects rice, almonds, a lot of crops,” he said.
Johnson also said the British exit will likely put a years-long delay on the Transatlantic Trade and Investment Partnership, the proposed trade agreement between the European Union and the United States. Marathon negotiations on the deal have centered on market access and regulation details. Agreement backers say billions of dollars hang in the balance.
Jeffrey DeBoer with the Roseville-based DeBoer Financial Group, which specializes in estate/retirement financial consulting, sent out a message to clients on Friday, noting the immediate impact on world markets but urging calm over the long term.
DeBoer said U.S. companies “simply are not that directly exposed to a slowdown in Europe. The U.S. economy as a whole is similarly insulated.”
He added: “Volatility in the near term is probably not worth reacting to.”
Barry Broome, president and CEO of the Greater Sacramento Area Economic Council, predicted limited effects in the Sacramento area, with the United Kingdom’s business core in the United States centered on the East Coast, particularly in Boston and New York City.
But Broome expressed concern about an increasingly divisive environment on a global scale.
“I think it’s obviously a very disappointing vote,” he said. “Like building a public-private partnership, we need communities that take stands that we’re going to work together. I think the vote is further evidence of polarization in countries on class issues and immigration issues. There’s no question that it’s unfortunate.”
Broome added that some economic analysts are projecting a recession in 2018, “and this vote makes the possibility of a recession more real.”
Unlike those relying on private, 401(k)-type retirement accounts, pensions from CalPERS and CalSTRS are protected. But if financial turmoil in the markets drives down earnings, taxpayers have to kick in more investment money to keep the funds whole.
“We are carefully monitoring the situation,” said Rosanna Westmoreland, spokeswoman for CalPERS. “As a long-term investor we don’t over-react to short-term volatility but will take appropriate steps to best protect our portfolio.”
CalPERS released a video of Ted Eliopoulos, chief investment officer, explaining the situation to members. “We don’t fear ... these types of volatile markets,” he says in the video. “We actually trade into them and look for opportunities.”
Former San Jose Mayor Chuck Reed, who has become a national advocate for rolling back public pension costs, said that the stock market’s plunge on Friday is “a warning shot” to retirement funds that bet heavily on the stock market.
“This underscores the weakness of the current policy” that assumes investment returns of up to 7.5 percent to meet guaranteed payouts to retirees, Reed said in an interview. “Whether this (Britain’s departure from the European Union) is enough of a warning shot to change policy, I’d say most likely not.”
Reed has twice tried to put a pension-change measure before California voters. He said Friday that he will try again after this year’s general election. The fallout from Europe’s turmoil, he said, lends strength to his argument.
“Relying on the stock market to get us out of the hole,” he said, “is a bad policy.”
The silver lining
For anyone hoping to vacation in Britain, a strong dollar should make everything from hotel rooms to haggis less expensive.
Observing political turmoil is free.
Also on the good side, O’Connell said: “The price of Scotch is likely to come down.”