Johannesburg — NINE out of 10 investment professionals polled yesterday said financial shares offered some of the best value to be had in the local equity market.

Although disagreeing on whether banks or life assurers offered the most value in the medium to long term, the bulk of the respondents said the boom in construction and resources stocks had made these relatively expensive. As an alternative, banks were seen as cheap, with good growth prospects.

"We regard the banks as being relatively cheap," said Claude van Cuyck, head of equities at Sanlam Investment Management (SIM).

Sam Houlie, head of equities at Investec Asset Management, held the same view and also regarded life companies as cheap.

The effect of the US's subprime mortgage crisis on SA's financial sector has been rather unfair but has pushed stocks lower, creating buying opportunities.

In the year to date, the JSE's banking index is up 9%. The resources index has gained 29%, and the all share 25%. Of the banks in the index, Capitec (17%) and Standard Bank (13%) have gained the most while Nedbank (2%) and Absa (0,9%) have lagged.

"The domestic banking sector has wrongly suffered under the threat of the global subprime issue and this presents an opportunity for investors to top up their holdings of banks," said Craig Pfeiffer, GM of investments at Absa Asset Management Private Clients, who favoured banks over life assurers.

"There may be a short-term opportunity cost in being in banks while the 'sexier' resources and construction stocks ride the crest of a wave, but longer-term investors will not harm their wealth-creation prospects with an overweight position in banks."

The time line considered by an investor will make a difference.

Elan Levy, investment strategist at Sasfin Frankel Pollak Securities, said that in the short term, financial stocks were likely to be volatile for a number of reasons, many of them related to the subprime mortgage meltdown. However, in the medium to long term the current prices offered "some pretty compelling valuations and are attractive entry points for longer-term 'long' positions".

Patrice Rassou, banking analyst at SIM, said the fundamentals for local banking stocks were still "very much in place" and agreed the fall off in share prices had been unwarranted. By comparison he thought the increase in commodity stocks had not been underpinned by fundamentals and that the "flight to safety" in these stocks was not justified.

Another factor in the banks' favour was the fairly widely held belief that SA was at the top of its interest rate-raising cycle.

Neville Chester, portfolio manager at Coronation Fund managers, pointed out that banking stocks typically started outperforming the market after the latest interest rate hike.

"Obviously the difficulty without the benefit of hindsight is determining which will be the last interest rate hike. We are firmly of the view that we have seen the last rate hike and therefore would be favouring banking stocks at the moment."

But if investors are going to get into banking stocks, which ones are offering value?

Van Cuyck reasoned that banks with large corporate exposure would weather a consumer slowdown better, and Houlie added that Investec's share price had fallen significantly versus its peers, even though its subprime exposure was "miniscule".

Houlie believed too many market pundits were making decisions based on a price:earnings ratio outlook. He said investors also had to look at what they were paying for the volatility of underlying earnings. Viewed in this way, financial stocks not only had relatively low price:earnings ratios but also offered low volatility.

Houlie's research had identified four top banking picks -- Standard Bank, Investec, Absa and RMB.

While banks may look lovely when judged by Houlie's metrics, one does have to take into account the fact that rising interest rates will cause more people to default on their loans.

"The key short-term valuation question is really the extent to which bad debts are rising, given the increase in interest rates and the current elevated levels of indebtedness of the consumer. I believe that this risk is currently not excessive," said Jason Chesters, chief investment officer at Tri-Linear Investment Managers.

He cited the fact that banks' management had experience with elevated interest rates putting pressure on the debtors' book; the National Credit Act would limit the issuing of low-quality debt; and he believed SA had reached the peak in the interest rate cycle.

Stephen Meintjes, head of research at Imara SP Reid, agreed that the National Credit Act could be "some kind of chastity belt" and said that corporate borrowing might take up some of the slack as consumers reduced their debt.

Then there were the people who were not so sure banks were the best bet. Matthew Kreeve, head of quants at Frater Asset Management, said his company had sold banks last year. He noted that since the first quarter of 2005, resources had outpaced banks with what Kreeve described as 100% outperformance.

"I think that many of the bank- buying or holding managers are really just saying, 'That's enough now, there can't be much more outperformance by resources from here on out' and are thus choosing banks," Kreeve said.

"We are concerned that spreads between the Organisation for Economic Co-ordination and Development and emerging market country debt are still too narrow.

"Along with other factors that prompted our selling of banks last year, we still feel this issue and the flow-through it will have to lending margins, bad debt and balance sheet management is not priced in by the analysts in their earnings forecasts."

Frater preferred insurers to banks from a risk point of view.

Foreign interest in SA's financial markets has soared in the past two to three years. Many of the market commentators said the potential performance of the local financial sector would be partly determined by global factors. For instance, Warwick Lucas, senior investment analyst at stockbroker Imara SP Reid, said that while banking stocks did offer some of the better value left on the JSE, they were not unique or cheap when measured against global peers.

"Unlike resources shares they are unlikely to benefit from offshore flows seeking out attractive diversification opportunities," Lucas said.

Kreeve disagreed. He felt foreign investors fleeing subprime problems would find South African financials suitably insulated and still exposed to the growth that could come from banking the unbanked.

"While their financial indices fall week to week -- especially relative to the broader market -- they are likely switching into our financials as a port of safety, and they often prove to be quite price insensitive when they do so," Kreeve said.

Whichever way you view it, there has to be something to the argument that the financial sector is the place to be when 90% of the respondents give it a thumbs up.