EUROPE'S most indebted countries are this year's biggest stock market winners, a signal that investors are convinced by assurances from the region's leaders that the single currency will survive.
Stocks in Greece, Spain and Italy, the worst performing developed markets in 2010, have gained 12pc on average this year. Spain's IBEX 35 and Italy's FTSE MIB are having the best start since 1998 while Greece's ASE Index is surging the most since 1999, according to data compiled by Bloomberg.
While last month 59pc of respondents in a Bloomberg survey said at least one nation will leave the euro within five years, stocks suggest investors are becoming less concerned about the sovereign debt crisis.
The rally is being fuelled by demand for the cheapest stocks and support for the single currency from German Chancellor Angela Merkel and French President Nicolas Sarkozy, according to JPMorgan Chase & Co. and SVG Investment Managers.
"The politicians are pulling together for the survival of the euro," said Michael Barakos in London, whose JPMorgan Europe Strategic Value fund's gains have already exceeded all of 2010 thanks to holdings including Spain's Banco Bilbao Vizcaya Argentaria.
"A lot of people had thrown in the towel on Europe. No matter what valuation, they did not want to take any risk here. People forget the market is not just economic, it is political."
Since peaking in 2007, shares in Greece, Spain and Italy remain some of the world's worst-returning stocks. Benchmark indexes in the countries are down an average of 50pc, compared with a 20pc drop for the MSCI World Index.
The ASE climbed 1.3 percent to 1,642.7 at the close of Athens trading yesterday. Spain's IBEX 35 lost 0.3pc to 10,774.7 and Italy's FTSE MIB slipped 0.3pc to 22,637.29.
They fell an average of 22pc in 2010 as investors fled Europe's periphery amid concern one or more nations may restructure debt. The majority of respondents to a Bloomberg Global Poll released on January 26 said that Greece and Ireland will default, while 59pc predicted at least one of the 17 euro nations will leave the currency union by 2016.
The euro had its biggest decline against the dollar since2005 last year, weakening 6.5pc. The Euro Stoxx 50 Index of the largest companies in the single currency area dropped 5.8pc while the broader Stoxx Europe 600 Index, which includes countries outside the region such as the . and Sweden, gained8.6 percent.