Now that the EU periphery has pulled through the sovereign debt crisis and is either out of recession or set to start growing towards the end of this year, investors are moving back in to benefit from the full range of the expected recovery. Greece, Italy, and Portugal stock markets are each up at least 14% so far this year, Bloomberg reports, Ireland isn’t fare behind with 10% gains, and even Spain has grown 4.3%, outperforming the S&P 500’s 1.3% growth year-to-date.

Europe EU

There’s no doubt that the growth is speculative, but there doesn’t seem to be much downside. After years of weak to negative growth, it’s hard to imagine that these markets could drop much further, and many companies that survived the last five years will be in a strong position when economies rebound.

Skeptics worry that rally is purely finance-driven: EU

“These markets are not lifting off because of an economic miracle in these countries. Italy’s unemployment hit a record high of 13% in February. Spanish and Greek unemployment are catastrophic, at nearly 26% and 28% respectively,” writes Matt Phillips for Quartz.

He sees the recent rally as signs of confidence in the banking sector instead of the larger economy. In Italy, for instance, banks make up 27% of the index and had enormous gains last quarter, approaching 60%, skewing the index.  With the European Central Bank standing behind the financial sector, determined not to allow backsliding, large banks might be the safest place to start increasing exposure to the EU periphery, but the reality is that hedge funds have been putting money into southern Europe since the beginning of 2013. The finance sector has been a part of their strategy, but so have infrastructure firms positioned to benefit from privatization, government bonds, even Greek gambling firm OPAP SA (Athens:OPAP).

EU periphery still well below 2007 levels

For anyone who can afford to wait on recoveries that may be a few years off, southern Europe has been sitting at the bottom of the trough for some time, and is just now starting to take off again. For anyone worried that they might have missed the boat, even with this quarters impressive returns, none of these markets are near their 2007 highs. The Athens Stock Exchange is still down 75%, Italy’s FTSE MIB is down 50%, and Portugal’s PSI 20 Index is down 44%. They would have to have many more double-digit quarters to get back to those levels, which is exactly why inflows are on the rise.

And of course most readers will agree, the main reason for the rally? Valuation… These countries were and are cheap (on most quantitative metrics) See a partial chart from Meb Faber of CAPE ratios in many of the countries mentioned.

EU CAPE
EU CAPE