Looking for European equity bargains? Buy banks, Germany

After gaining 33 percent in eight months, the Euro STOXX 50 index of euro zone blue chips is at its most expensive in nearly three years when prices are compared with how much firms are expected to earn over the next 12 months.

But the temptation to sell two of the region's biggest gainers - financials and German shares - could prove costly given they are still attractive on several measures of value.

"Cheap has quickly become less cheap. We suggest that investors are more selective on risk in the near term," said Jonathan Stubbs, European equity strategist at Citi, who favours the financial sector.

Bank stocks were hit hard during the financial crisis and again during the euro zone crisis because of their exposure to troubled sovereign debt.

They have rebounded but remain one of the cheapest sectors in Europe on a price/earnings basis and look especially cheap when shares are compared with the value of the assets on the company's books - the price/book ratio.

Concern about the quality and value of these assets was fanned by the big writedowns seen during the crisis. As a result, banks are trading nearly a third below the 10-year average of their price/book ratio, say strategists at HSBC.

They like the sector and also highlight tech hardware, energy, telecoms, media and healthcare as being undervalued in Europe even after the recent broad equity market rally.

Healthcare, which is traditionally seen as a

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