* MSCI Africa index up 60 pct over past 2 years
* Gains seen this year, but muted
* Investors need to look beyond Kenya, Nigeria
By Carolyn Cohn
LONDON, Jan 9 (Reuters) - A two-year rally in frontier African stocks, which has withstood the Nairobi shopping mall attack, violence in the Central African Republic and fighting in South Sudan, is showing signs of fatigue, pointing to muted gains this year.
The MSCI Africa index, which excludes South Africa but includes three North African markets, has risen more than 60 percent over the past two years as investors sought plays on the rising purchasing power of middle class consumers in the world's fastest-growing continent.
But inflows into sub-Saharan African equity funds have slowed from more than $3 billion in 2012 to $1 billion last year, according to Boston-based fund tracker EPFR.
With stock valuations in frontier markets now higher than their emerging market peers, investors will need to look beyond blue-chip companies in major markets like Kenya to smaller companies or less familiar markets like Botswana to find value this year. (GRAPHIC: see link.reuters.com/maz75v).
"I do not think we are going to see a correction, but I do not think we are going to see the same kind of rally," said Ronak Gadhia, equity analyst at frontier markets broker Exotix, who focuses on sub-Saharan African financial stocks.
The MSCI Africa index rose 18 percent last year after a 38 percent leap in 2012.
Some of the best performers have been in Nigeria, with GT Bank surging 90 percent over the past two years while Nestle Nigeria has nearly tripled.
Nigeria is still probably the most attractive major frontier market in the region but its outlook is clouded by political risk this year, analysts say.
Economist Jim O'Neill, who coined the acronym BRIC (Brazil, Russia, India, China), has included Nigeria in a category of most promising economies: the MINTs - Mexico, Indonesia, Nigeria and Turkey.
Nigeria's weighting in the MSCI frontiers index should increase to 20 percent from 14 percent following an upgrade of the United Arab Emirates and Qatar in May, ensuring it attracts more attention from both dedicated emerging market and larger global investors.
Investors point to the fact that there are fewer than 30 million bank accounts for Nigeria's 160 million population, and that Africans are starting to consume more, rather than just acting as exporters of raw materials.
But they also stress the drawbacks of inadequate infrastructure in Nigeria, particularly in the power sector, along with concerns about the impact on the economy of presidential elections next year, and a change in central bank governor this year.
Nigeria is sub-Saharan Africa's largest market after South Africa, which is an emerging, not a frontier, market.
But with daily turnover on the Lagos stock market less than $30 million, its appeal to large international investors is limited. That is even more true of Kenya, Mauritius or other African markets.
"Some of these markets did very well last year. They may go more slowly or take a break," said Sven Richter, head of frontier markets at Renaissance Asset Managers.
"I am not predicting they will go down - they should rise at a slower rate."
Investors have not been deterred by violence in African markets, notably the attack on a Nairobi shopping mall in September which killed 67 and in Nigeria where thousands have died since the Islamist group Boko Haram launched an uprising against the state in 2009.
The continent has also been less-sensitive than other high-yielding markets to the prospect of the U.S. Federal Reserve reducing its stimulus programme from this month, although that will still be a risk.
"It's more about the growth story locally," said Razia Khan, head of Africa research at Standard Chartered.
"The Africa growth story is consistent, the impact will still be positive."
The International Monetary Fund forecasts economic growth in sub-Saharan Africa will accelerate to 6 percent this year, from an estimated 5 percent in 2013.
But some of last year's outperforming stocks may find the going tougher.
Kenyan power generation company Kengen soared more than 50 percent in 2013, but further gains may be hobbled by huge capital raising to finance new generation plans.
Nigerian banking profitability could be at risk from more punitive reserve requirements.
Local funds, however, have helped boost share prices in recent months as they switched from fixed income markets which have lost some of their yield appeal.
Nigeria's pension assets have more than doubled in the last eight years, to $24 billion.
"The allocation to equities is increasing, moving from 10-11 percent to 13-14 percent, and we see that increasing even further," said David Mcilroy, chief investment officer of Africa fund Alquity.
And for those funds small and nimble enough to move into the tinier African markets, there could be other options.
Analyst picks include Botswana microfinance company Letshego , Mauritius' second bank Mauritius Commercial Bank and Rwanda's Bank of Kigali.
Richter said investors would gradually become more adventurous in stock-picking, moving away from international names and towards buoyant local businesses.
"They first get their toes into the market, then look at other opportunities." (Additional reporting by Duncan Miriri in Nairobi; Editing by Susan Fenton)