Texas booms, in­vestors yawn

The Pak Banker - - OPINION - Matthew A. Win­kler

For all its suc­cess as the fastest-grow­ing big state, lur­ing the most busi­ness with a paucity of taxes and reg­u­la­tion, Texas is an in­fe­rior in­vest­ment. Even be­fore the 14-month col­lapse that cut the price of oil by 63 per­cent, the pub­licly traded shares of Texas com­pa­nies (64 per­cent are energy-re­lated) un­der­per­formed the Rus­sell 3000 In­dex. Since 2010, they've also trailed com­pa­nies domi­ciled in Cal­i­for­nia and New York, states known for high taxes and en­thu­si­asm for reg­u­la­tion, ac­cord­ing to data com­piled by Bloomberg.

The Lone Star State's AAA-rated debt also gets mod­est re­spect in the bond mar­ket. Its re­turn is third from the bot­tom among the nine states shar­ing the best credit rat­ing dur­ing the past five years. What makes the Texas econ­omy so im­pres­sive also lim­its its ap­peal in fi­nan­cial mar­kets. In­vestors aren't look­ing at the past and present. They're look­ing for ex­cit­ing things in the fu­ture. That can con­fer an ad­van­tage on states that are will­ing to ac­tively shape their des­tiny and to in­vest in things like ed­u­ca­tion and in­fra­struc­ture. Low costs are fine, but high value is bet­ter. Texas ex­tols its low-cost, non­in­tru­sive gov­ern­ment ap­proach as "wide open for busi­ness,'' and it con­tin­ues to lure com­pa­nies seek­ing cheaper la­bor and cap­i­tal. Toy­ota, the world's No. 1 maker of ve­hi­cles, last year moved its North Amer­i­can head­quar­ters and 2,000 jobs to Plano from Tor­rance, Cal­i­for­nia.

Be­ing the cheap­est big state for busi­ness has ben­e­fits. Texas' gross do­mes­tic prod­uct in­creased more than the GDP of at least the 10 largest states in the U.S. dur­ing the past five years. Since 2010, the work­force in Texas ex­panded 15.9 per­cent, the most af­ter North Dakota and Utah. Texas per­sonal in­come in­creased 37.2 per­cent dur­ing the same pe­riod, bet­tered only by North Dakota and Wy­oming. Tax rev­enue in­creased 62.3 per­cent, trail­ing only the Dis­trict of Columbia, New Hamp­shire, North Dakota, New York and Penn­syl­va­nia. Texas home prices rose 17.3 per­cent, lag­ging the gains only in North Dakota, D.C., Cal­i­for­nia, Hawaii and Colorado.

Yet none of these achieve­ments make Texas bonds a win­ner in the mar­ket for com­pa­ra­ble state and lo­cal gov­ern­ment debt. So far this year, the to­tal re­turn, or in­come and price ap­pre­ci­a­tion, of Texas has amounted to 1.55 per­cent, bet­ter than only two other states with AAA-rated debt. The other six AAA states are en­joy­ing su­pe­rior re­turns: Vir­ginia at 2.05 per­cent, North Carolina at 1.81 per­cent, Ge­or­gia at 1.84 per­cent, Utah at 1.79 per­cent, Mis­souri at 1.65 per­cent and Mary­land at 1.57 per­cent, ac­cord­ing to data com­piled by Bloomberg. Like bond­hold­ers, stock in­vestors also per­ceive be­ing cheap­est for busi­ness as a strat­egy that fa­vors the present over the fu­ture.

While com­pa­nies domi­ciled in Texas pro­duced a to­tal re­turn of 52 per­cent in the three years lead­ing up to June 2014, when oil prices started to fall, the bench­mark Rus­sell 3000 In­dex re­turned 58 per­cent dur­ing the same pe­riod. Com­pa­nies based in Cal­i­for­nia and New York, two states Texas gover­nors de­ride as bad for busi­ness, re­turned 75 per­cent and 52 per­cent dur­ing those three years. So far this year, the Au­gust mar­ket crash pushed down stocks nearly ev­ery­where. Texas shows a to­tal loss of 16 per­cent, worse than Cal­i­for­nia's 2 per­cent loss, New York's 5 per­cent loss and the Rus­sell's 5 per­cent re­treat, ac­cord­ing to data com­piled by Bloomberg. It's true that the oil-price col­lapse hit Texas com­pa­nies hard. But it can't ac­count for in­fe­rior in­vest­ment per­for­mance in other in­dus­tries. Shares of Texas healthcare com­pa­nies re­turned 104 per­cent dur­ing the past five years, com­pared with the 163 per­cent av­er­age for the in­dus­try. Texas in­for­ma­tion tech­nol­ogy com­pa­nies re­turned 98 per­cent, com­pared with 100 per­cent for the U.S. in­dus­try. Texas con­sumer dis­cre­tionary com­pa­nies, which in­clude J.C. Pen­ney, re­turned 110 per­cent com­pared with 152 per­cent across the U.S. Texas in­dus­trial com­pa­nies, which in­clude KBR, re­turned 84 per­cent com­pared with 96 per­cent for U.S. in­dus­trial com­pa­nies since 2010.

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