* Fears over central bank, elections dampen risk appetite
* Central bank governor Sanusi to stand down next June
* Funds switch to short-term bonds and t-bills
* U.S. Fed tapering likely to hit emerging markets
By Chijioke Ohuocha
LAGOS, Dec 17 (Reuters) - After a bumper year for Nigerian stocks, investors are selling riskier assets and moving money into short-term debt due to uncertainty over government spending and the future leadership at the central bank.
Africa's second-largest economy and biggest oil producer has been growing as an investment destination. Foreign bond holdings swelled fivefold in the last year to an estimated $5.4 billion, thanks to its inclusion in the JP Morgan index and a stable naira.
Central Bank Governor Lamido Sanusi, who is due to stand down in June, has been the driving force behind that currency stability and in pushing inflation down to a five-year-low of 7.8 percent in October. Inflation inched up slightly to 7.9 percent in November.
The bank has kept rates on hold since last year after six successive hikes in 2011, including a 275 basis point rise in October 2012 to 12 percent, to ward off speculation against the naira, which fell 4.5 percent against the dollar in 2011.
Investors worry Sanusi's successor may not follow his tight monetary policy stance, while an expected spike in government spending before elections in 2015 adds to currency risks, prompting a wait-and-see approach by many investors.
Analysts expect the currency to weaken to 164 naira against the U.S. dollar by the end of 2014 - not far off the Finance Ministry's June forecast of 163 naira to the dollar by end-2014.
"The uncertain transition at the central bank and the pre-electoral climate in 2014 will weigh on sentiment," said Samir Gadio, emerging market strategist at Standard Bank.
Domestic pension funds and asset managers are cutting exposure to stocks and parking cash in treasury bills to preserve gains recorded after sharp rises in the main share index, which is up 41 percent this year.
Stocks had begun rising last year as Nigeria made a late recovery from the 2009 banking crisis, luring back foreign investors as well as locals previously scared away.
Bond yields have remained steady at around 12.5 percent since November, while the stock index eased off a five-year high in June and has been largely flat for a month after hitting a resistance level around 39,000 points.
The shortest term 3-year bond was sold last week at 12.90 percent, higher than the 12.55 percent it sold last month, while the one-year treasury bill, yielding 11.66 percent, has been attracting the most demand.
"We have switched to the short-end of the (yield) curve," said Adeniyi Falade, managing director of Crusader Sterling Pension, which has increased the weight of bonds and short-term debt in its portfolio by 10 percent to 70 percent over the last three months and cut exposure to stocks.
"We're trying to match asset maturity with uncertainties around the exit of the central bank governor and forthcoming elections," said Falade, who manages over 100 billion naira ($630 million) in pension funds.
FSDH, a domestic asset management firm, which manages over 50 billion naira ($315 million), said it viewed the equity market as overbought and has reduced its exposure in the past three months in favour of short-term treasury bills.
"We had 60 percent in equities three months ago (but) now it's come down to 50 percent," FSDH said.
Offshore investors have also followed suit, buying up treasury bills and exiting long-term bonds and stocks.
Foreigners account for around 60 percent of stock trading on the local bourse, stock exchange data show.
"Net outflow in Nigeria would put pressure on bond yields ... Overall, foreign investors are likely to move towards the short-end of the yield curve to reduce risks associated with currency weakening," said Angus Downie, head of economic research at Ecobank.
"The lack of information on potential candidates to replace Sanusi is a concern. It's possible his replacement could be keen to loosen policy given relatively low inflation," Downie said.
There could be further capital reversal in Nigeria when the U.S. federal reserve ends its bond buying programme, which has kept emerging markets awash with cash, analysts say.
Sanusi's tight banking regulation changes this year may also limit the upside in the equity market as the financial sector accounts for 40 percent of the index, analysts say.