Even the permabears have stopped growling. Contrarian investors everywhere are focused on bargains in the eurozone, as they follow the dictum attributed to Nathan Mayer Rothschild: buy when there’s blood in the streets, even if the blood is your own.

Panic, if not blood, is evident across the world. Mutual funds have the highest cash holdings since the eurozone crisis began, a Merrill Lynch survey shows. Many investors have dumped periphery assets, as companies and residents shift money to Frankfurt or Zurich in case of a euro break-up.

On the face of it this is a perfect time for contrarians able to ignore the herd and buy into the hated eurozone.

Peripheral bank shares are at 1985 levels, according to the Datastream PIIGS Banks index. US shares’ one-year returns are outperforming the eurozone by the most since 1991.

But are European shares cheap? The best long-term valuation tool (the cyclically adjusted price/earnings ratio, comparing price with a decade of profits) suggests continental European shares are as cheap as in the early 1980s. But it is worth understanding why.

The eurozone looks like a bargain mostly because banks and utilities are so cheap. The financial sector in the periphery trades at just seven times forward earnings. Utilities are valued only a little higher, as investors fear cash-strapped governments will use them as piggybanks.

Strip out financials and the eurozone core is at 10.5 times earnings, while the US is at 12.4 times and the periphery just nine times. Unfortunately, this may not represent a bargain. The eurozone core, excluding financials, is at less of a discount to the US than it has averaged in data back to 1989. The peripheral discount is only slightly above average.

Worse, core eurozone shares are above last year’s lows, even though eurozone problems look more serious. Contrarians can buy eurozone bank shares, but there is a good reason they are cheap: they may be worth zero.

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