A few months ago, I talked about how a financial transactions tax can have significant unintended consequences. Using Hungary as an example, I said that when the government implemented a levy of 0.5 percent on banks’ assets, bank credit growth rates plummeted. As a result, Hungary’s household and corporate sector credit growth rates became anemic compared to other Eastern European countries.

Now it appears that Italy is going “Hungary” by introducing a financial transaction tax that became effective in March. For shares of Italian companies, investors are taxed an additional 0.12 percent of the value of the shares purchased in a regulated market or trading platform. For over-the-counter transactions, the tax is even more costly, at 0.22 percent, according to Reuters.

Since going into effect on March 1, trading in Italian stocks through desks of major banks has plummeted. According to the Financial Times, average daily trading volumes in March have dropped about 40 percent compared to the previous month. “This is the biggest fall in volumes on any major European exchange so far this year,” says the FT.

I believe this is a great example of how government policies are precursors to change. With a reduction in trading volumes, fewer buyers and sellers participate in the bid-and-ask process, and less competition can cause prices to languish.

With fewer buyers owning shares of public companies, investors’ portfolios are likely going to be deficient in growth assets. Take a look at Investment Company Institute data showing a decline in the percentage of households in the U.S. holding individual stocks in 2012 compared to 2002. In addition, Americans are less likely to own shares of their companies’ stock today compared to 10 years ago.

With less stock ownership, many of these U.S. investors likely missed out on the market’s tremendous rise over the last few years.

In March 2013, ICI issued a response to the financial transaction tax that’s been introduced in the U.S., saying, “A financial transaction tax is bad policy that substantially reduces the investment returns of fund investors and retirement savers. Whether introduced in the United States, Europe, or elsewhere, financial transaction taxes slow economic growth, drive away financial activity, and make markets less efficient.”

I believe leaders in Washington D.C. and around the world should be focused on policies that encourage individuals to invest rather than making it more onerous. I hope those considering similar financial transactions are taking note.

In 2012, Turkey was the best performer among the emerging markets we track on our Periodic Table showing a decade of returns. All developing countries rose last year, but stocks in Turkey climbed an astounding 56 percent.

See a decade of results for yourself with our interactive periodic table

While visiting the country last week, I was happy to see my explicit knowledge of Turkey’s growth was supported by my tacit knowledge.

Istanbul has been in the midst of a fantastic transformation from an impoverished population to one of affluence. Popping up among the beautiful Ottoman mosques, Byzantine churches, palaces and bazaars are ultra-contemporary art sculptures, shopping malls and lush landscaping. This blend of ancient with modern fits well with the young, vibrant and culturally diverse crowd that hangs out in the local cafes, shops and galleries.

Investment managers like me aren’t the only ones showing increased interest in Turkey’s new-found prosperity. Secretary of State John Kerry visited Turkey during his first overseas trip as America’s top diplomat.

German Chancellor Angela Merkel, the powerhouse figure of the European Union, was also in Ankara recently to meet with President Abdullah Gul and Prime Minister Recep Tayyip Erdogan. The topic of their discussion is not new, but suggests a “new chapter” for Turkey. These leaders are picking up the conversation started years ago regarding Turkey entering the European Union (EU).

Tim Steinle, portfolio manager of the Eastern European Fund (EUROX), says that unlike Greece, which fudged its numbers to join the EU, Turkey was held to a higher standard. But it doggedly pursued its aspiration, and in the process of implementing the EU accession chapters, such as the Right of Establishment & Freedom to Provide Services, Company Law, Financial Services, Information Society & Media, Statistics, Financial Control, and Science & Research, had modernized its economy, making it competitive with those of Western Europe. In addition, open trade with the EU allowed it to build a diversified export economy.

Turkey’s admittance to the EU had stalled over Cyprus, but more recently, France and Germany seem to be warming to the idea. Under newly elected President Francois Hollande, France is opening another chapter to the accession, and Angela Merkel’s visit to Turkey is signaling a shift in Berlin’s position on Turkey’s membership.

This wasn’t the only time Turkey reformed its policies. In 2001, the country experienced its own devastating financial crisis, and as a result of that experience (with which the rest of the world can now sympathize), the government adopted tough, but important financial and fiscal reforms. These reforms helped the country rebound, and its strong banking regulations kept banks well capitalized compared to the U.S. and Europe.

In the charts below, you can see the result of the government’s determination. From 2010 through 2012, Turkey’s GDP exceeded that of Europe, the Middle East and Africa (EMEA), as well as the rest of the world. Through 2015, GDP is also expected to be greater than EMEA’s GDP as well as overall world GDP. Simply stated, Turkey “remains superior in the region,” says Wood & Co.

Turkey’s manufacturing sector, in areas such as the automotive industry, white goods that include refrigerators and washing machines, and glass makers, has also been growing in strength.

For nearly two years, Turkey’s purchasing managers’ index (PMI) has been significantly stronger than Europe’s and “outstrips global averages,” says Wood & Co. Although the PMIs around the world fell rapidly in mid-2011, Turkey’s manufacturing hasn’t fallen below the expansion number of 50 as often, and as significantly, as Europe. According to Wood, Turkey’s PMI also recovered, “signaling growth ahead.”

Turkey’s latest manufacturing PMI number of 53.5 in February was slightly lower than its January figure of 54.0, but manufacturing remains solid and in expansion territory. Businesses are reporting an increase in new orders, new products and new clients and “new business from abroad increased at the fastest pace since January 2012,” says HSBC.

With the country exhibiting positive demographics, strong consumer demand and an open, competitive economy, Turkey is at a figurative, as well as literal, crossroad between Europe and Asia. The European Energy commissioner Günther Oettinger annoyed Germany when he suggested that the EU needed Turkey more than Turkey needed the EU: “I would like to bet that one day in the next decade a German chancellor and his or her counterpart in Paris will have to crawl to Ankara on their knees to beg the Turks, ‘Friends, come to us.’”

However, Spiegel Online reports Erdogan hinted that the emerging economy may consider joining the Shanghai Cooperation Organization, which includes countries such as China and Russia, instead. “The economic powers of the world are shifting from west to east, and Turkey is one of these growth economies,” remarked the prime minister.

My visit to Istanbul was thrilling, and I’m equally excited about the continued investment prospects for Turkey as it gains in economic strength. U.S. Global’s Eastern European Fund (EUROX) is a unique way to gain access to this area, as a significant percentage of its holdings are located in Turkey. Read more about the fund here.

Tim Steinle contributed to this commentary.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

During this Chinese New Year, more than a billion people will be welcoming in the Year of the Black Water Snake, celebrating with family and friends all week long. The previous Year of the Black Water Snake was in 1953, which was when China launched its first Five-Year Plan and the average annual income for a family in the U.S. was about $4,000.

As the Dragon took its last breath of the year, it exhaled plenty of fire into China: Looking at year-over-year data as of the end of January, new bank loans, passenger car sales and exports all rose while inflation was slightly lower. Imports of key commodities we track, crude oil, aluminum and copper, were also exceptional, with month-over-month increases of 6 percent, 4 percent and 3 percent, respectively.

Increasing money supply and easing policy in China have also helped to breathe life back into China’s equity market. Below is an update of the chart we showed Investor Alert readers back in October when the venomous sentiment toward China was at extreme levels. We believed Chinese stocks were significantly undervalued compared to emerging markets and that its equities were due for a rebound. I indicated that an increase in money supply would be the needed oxygen for an equity resurgence.

Over 2013, we expect the government to continue its accommodative efforts, which should reinforce the equity rally. In addition, the new pyramid of power is focused on growth, as it seeks to improve and reform policies that will provide its residents with opportunities and social security, increase incomes and raise standards of living, which should encourage domestic consumption.

Growth is set to be considerable over the next several years: Jefferies Equity Strategy team anticipates that China’s GDP will grow at a compound annual growth rate of 6.9 percent and by 2025, will almost equal that of the U.S.

In addition, China’s GDP per capita is projected to climb to about $18,000 on a purchasing power parity and domestic consumption is likely to make up a larger portion of its GDP, jumping from about 49 percent in 2012 to 73 percent of GDP by 2025, says Jefferies.

To achieve these goals, there needs to be significant reforms to promote a “new urbanization.” While China has been anticipating the rise of urbanization by building out the country’s infrastructure of medical services, housing, water, high speed rail system, and roads, the mobility of many residents remains restricted by its internal residence status, called the hukou (pronounced “who-cow”).

First put into place in 1958, the hukou system was a means of controlling migration throughout the country. It designates where a person or household may reside by geographic area. According to J.P. Morgan’s Jing Ulrich, “the system’s primary function was to maintain a sufficient agricultural labor force, while preventing excessive strain on urban resources.”

Under this registration system, if a resident does not have an urban hukou, the family has no access to social benefits such as free education, health care and pensions that are provided to permanent residents of that city.

Michael Ding, portfolio manager of the China Region Fund (USCOX), was raised in rural Dalian and remembers what it was like living under the registration system, which he says was driven by the government’s need to ration food. Still fresh in leaders’ minds were memories of millions of people dying from starvation, and the government wanted to ensure there was enough food for urban residents.

With this upbringing, Michael developed a knack for quickly understanding rationing systems, as his family was unable to purchase additional food regardless if they had money or grow vegetables in their backyard.

So while it was reported that more than half of China’s population lives in an urban area, only about one-third of the total population holds an urban hukou. Andy Rothman from CLSA calls these roughly 250 million migrants “quasi-urbanized,” which means that one worker lives in the city, while the rest of the family remains in the rural home. This equates to a real nationwide urbanization rate of only about 35 percent. You can see in Jefferies’ chart how the official urban residence status differs across the country compared to the urbanization ratio.

If the government reforms the hukou, it is estimated that 600 million people might move to the cities over the next 20 years. This includes 300 million migrants becoming “new urban residents” and 300 million rural residents moving to urban areas by 2030, says Citi Research. According to its data, “urbanization could bring another 150 million surplus rural laborers to the cities.”

“[P]otential reforms in hukou registration and healthcare systems together with extended substance allowance will likely encourage more migrant workers to live in cities for the long term with higher consumption propensities,” says Morgan Stanley. Because urbanization is a big driver for the housing market, CLSA believes property sales in China’s 600 third-tier cities could significantly benefit from hukou reform, as about 100 million migrant workers currently reside in these cities.

The government has begun to factor in the massive ramifications of these families moving to the cities. According to J.P. Morgan, “investments in urbanization are already placing a heavier emphasis on the human benefits of development.” Regarding social housing, in 2012, the country met its goal of starting on 7.2 million units and completing about 5 million units, according to the research firm. For 2013, China’s plans call for an additional 10 million units that will be under construction or complete by the end of the year.

What to Expect in the Year of the Snake: Bite or Might?
Maybe both, if you follow CLSA’s Feng Shui Index. Every year since 1992, CLSA Asia-Pacific Markets team takes a lighthearted look at the fortunes that may befall the Hang Seng Index.

During the Year of the Dragon, CLSA’s predictions of the Hang Seng Index came amazingly close to how stocks actually performed. Equities in China fell into a bit of a slump toward the beginning of the year. Then the Dragon woke up and fired up the markets toward the latter half of the Chinese year.

Over the next several months CLSA foresees Chinese stocks to slink like a snake, rising in the beginning of the year before sidewinding in the latter half of the year. According to CLSA, the elements fall out of balance, as “the crucial Fire element all but dies away, Earth falls, Metal overshoots and Water puts a damper on prospects.”

Download your copy of CLSA’s Feng Shui Index here.

In times of growth, a young snake sheds its skin often, sloughing off a worn exterior to reveal a fresh layer of scales. The Asian giant has experienced growth the world has never seen before, and during the Year of the Snake, we look forward to seeing a new leadership take action, sloughing off worn policies to unveil a stronger vibrant economy. See how we’ve positioned the China Region Fund to benefit from this potential growth.

Don’t miss the presentation that received more than a quarter-million page views on businessinsider.com. To download your copy, go to www.usfunds.com, follow us on Twitter or like us on Facebook.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong.

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