Texas GDP outpaces other big states, but investors yawn
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 14month 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, which includes 3,000 largest publicly traded U.S. companies.
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, Bloomberg data show.
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.
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, Calif.
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. in the past five years. And since 2010, the workforce in Texas expanded 15.9 percent, the most after North Dakota and Utah.
Yet these achievements don’t make Texas bonds a winner in the market for comparable state and local government debt. So far this year, the total return of Texas has amounted to 1.55 percent, better than only two other states with AAArated debt.
And 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 Russell 3000 Index returned 58 percent in the same period. Companies based in California and New York, two states Texas governors deride as bad for business, returned 75 and 52 percent, respectively.
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 health care companies returned 104 percent during the past five years, compared with the 163 percent average for the industry.
Growth in per capita income in California and New York is superior to Texas. All of which suggests that being cheapest for business isn’t necessarily best for investors.