Greece has become the poster child for fiscal mismanagement and profligate spending. The country's reckless behavior is often cited as an example for other nations to avoid. Despite the disgrace heaped upon Greece for its large sovereign debt, the Greek stock market has performed relatively well in 2012, generating a positive return for investors.

SEE: An Introduction To The PIIGS

The Athens Stock Exchange General Index was up 8% in the first three months of the year, according to Bespoke Investment Group. The long term performance of the Greek market is still abysmal, with the index down approximately 50% over a one-year time period.

What's Going on Here?
It's difficult to come up with a logical explanation for the positive performance of the Greek stock market in 2012. The Greek economy has been in a recession for five years, with GDP falling 6.9% in 2011, and economists predicting that GDP will contract by an additional 5% in 2012. The Greek unemployment rate averaged 17.1% in 2011 and hit 21.8% in April. Even the Greek Prime Minister doesn't expect economic growth to resume until the end of 2013, at the earliest.

Relief Rally
The positive return for the Greek stock market in 2012 might be caused by investor relief over the recent aid package provided to Greece by the European Union (EU) and International Monetary Fund (IMF). This package, which totaled 130 billion euros, was approved in March 2012.

Greece also agreed to make spending reductions, and institute other austerity measures as a condition of receiving this aid package, and the country offered owners of its sovereign debt a new set of government securities to replace current holdings. The bond swap deal was accepted by 97% of holders and is expected to reduce Greece's debt to GDP ratio to 116.5% by 2020.

Although many market pundits have criticized these measures as only temporary fixes that don't adequately deal with the problems, the market tends to think short-term and may have bid up the Greek stock market.

Whither Spain
If an investor subscribes to the relief rally theory, then the situation in Spain may provide the next opportunity to make money, as the Spanish stock market was down 7.7% in the first three months of 2012, according to Bespoke Investment Group.

The attention of the market has now turned towards Spain's financial situation, and, if a similar set of aid packages are offered, and spending cuts and austerity measures are instituted, the Spanish stock market may undergo a relief rally as well.

The economic situation in Spain is also deteriorating, with the unemployment rate rising for eight consecutive months, reaching above 23% in February 2012. The economy grew 0.7% in 2011, but GDP is expected to contract 1% in 2012.

Investors who want to put money to work here can purchase the iShares MSCI Spain Index, an exchange-traded fund (ETF) that seeks to track the Spanish stock market.

Some investors have cited the valuation of the Greek stock market earlier in the year as the proximate cause of its recent performance. In January 2012, the overall market was trading at just over a six multiple on 2013 estimated earnings, and at a 2013 price-to-sales ratio of 0.6.

While these multiples seem cheap and may attract some investors, valuation is only one part of the investment process, and shouldn't be relied on exclusively to justify a purchase. It's possible that an investment here could be the ultimate value trap, particularly if the worst fears of the skeptics of the Greek bailout materialize.

Investors who believe that the problems in Greece are over and economic growth will resume over the next two years, should look at the Global X FTSE Greece 20 ETF. This ETF attempts to track the performance of the 20 largest Greek stocks.

The Bottom Line
The Greek stock market is up 8% in 2012, a performance that appears to be at odds with the current fiscal and economic situation in that country. This is either a bear market rally or the beginning of several years of outperformance for that country.

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