Spain, Italy, Greece stocks back in fashion

Spanish, Italian and Greek share prices recovered sharply in January, after a dismal 2010 on concerns over sovereign debt problems, with analysts saying Italy offers the safest bet of these euro zone peripherals. Concerns over higher inflation in booming emerging markets, cheap valuations and tentative signs of stability in the euro zone sovereign debt crisis have led investors to pick up shares in Italy, Spain and Greece.
Investors who were concerned the debt crisis could spread from bailed-out Greece and Ireland to Portugal and Spain sold the euro, peripheral government bonds and equities issued by those countries last year. Italian, Spanish and Greek blue chips have risen 10 to 12 percent so far this month, outperforming a 2.4 percent rise in the benchmark STOXX Europe 600 index and a 3.6 percent gain in Germany's DAX. Last year the three markets lost 13 to 36 percent, while the STOXX Europe 600 advanced nearly 9 percent and the DAX rose 16 percent.
Another sign of improving sentiment in the euro zone, the euro has advanced 2.6 percent against the dollar after losing 6.6 percent last year. Yields on 10-year Spanish government bonds over benchmark German Bunds have tightened about 35 basis points this month. France's CAC 40 also underperformed the broader European market last year, down 3.3 percent.
Spain's IBEX 35 carries a 12-month forward price-to-earnings of 10.4 times versus a 10-year average of 13.3 and the STOXX Europe 600's 11, Thomson Reuters Datastream shows. Predicted earnings surprise - a measure which weights analyst result estimates according to their track records - suggests that northern countries offer an average 0.5 percent earnings upside in 2011, Thomson Reuters StarMine data shows. This compares with a 4 percent drop for the peripheral economies, a figure that is inflated by an expected 22 percent drop in earnings for Greek stocks in the ongoing year.