"Falling knife" stocks: folly or fortune?

By Jennifer Hill, Personal Finance Correspondent

LONDON (Reuters) - Nervous investors might be shying away from equities amid market volatility, but some are seeking to profit from plummeting prices.

Out-of-favour sectors -- financials and house-builders in particular -- are experiencing an upturn in buying, as investors seek to capitalise on their weakness.

Shares in these sectors have plunged in the wake of the credit crunch and torrid housing market conditions.

Yet, it is these very stocks that largely make up broker TD Waterhouse's latest top 10 retail "buys", as investors plough into Royal Bank of Scotland, Barclays, HBOS, Barratt Developments, Lloyds TSB, Taylor Wimpey and Bradford & Bingley.

Without doubt, financial and construction stocks have been two of the largest casualties of the credit crunch and falling house prices.

Banking stocks have taken a battering amid the rising cost of money market rates and an increase in bad debts that have hit margins, while house-builders are feeling the pinch from the beleaguered housing market.

Almost 300 billion pounds -- one billion pounds per day -- have been wiped off the value of Britain's homes since the start of the property price downturn last September, according to home valuation website Zoopla.co.uk.

The soaring cost of borrowing -- fixed-rate mortgages have hit a 10-year-high, says Moneyfacts.co.uk -- and a widespread tightening in lending criteria are adding fuel to the fire, as homeowners sit tight and first-time buyers find it increasingly difficult to get a foothold on the housing ladder.