LONDON Feb 29 Growing global bullishness may erode South African stocks' perceived safe haven status, which helped them outperform many emerging markets last year despite infrastructure bottlenecks, political risk and rand volatility.
The shift is already evident in returns with shares in South Africa's BRIC peers all romping higher, faster than the 7 percent gained by the former this year.
South Africa's stocks kept their value in 2011 in local currency terms, while fellow members of the political BRICS grouping -- Brazil, Russia, India and China in addition to South Africa -- all fell around 20 percent. Developed market stocks lost nearly 8 percent in dollar terms.
Still, south Africa's broader all-share index hit record highs last month and is trading within one percent of those levels, while the more closely-watched Top 40 index index reached three-year highs.
But, analysts say, many of these gains are due to last year's relatively strong performance.
Investors have attributed South Africa's defensive appeal to its insulation from major markets and its healthy financial system, which have sheltered it from the euro zone debt crisis.
The country's core gold mining sector has also gained from heavy safe-haven buying of gold since the 2008 crisis erupted.
But now investors worldwide have clearly switched into risk-on mode, hailing stronger U.S. economic data, quantitative easing by the Federal Reserve and the European Central Bank and a second bail-out for indebted euro zone member Greece.
Meanwhile locally, African National Congress leadership elections later this year are seen likely to encourage government spending in South Africa, rather than reform.
"We are underweight South Africa and have been for a while. Recently we have become a little bit more negative," said Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management.
"Political risk is increasing, the growth numbers are very uninspiring."
Morgan Stanley this month downgraded South African stocks to "equal weight" from overweight, and cut the country's 2012 growth forecast for the country to 2.5 percent. South African finance minister Pravin Gordhan cut the official forecast to 2.7 percent at the country's budget speech last week.
John Lomax, head of emerging equities at HSBC, is also cautious, even as tensions with Iran take some of the shine off riskier emerging markets.
"We have been quite positive on emerging markets all year, we have been underweight South Africa," he said.
"Looking ahead, it's hard to be as positive, but we still see further upside for emerging markets, but we expect South Africa to lag."
South Africa is regarded as a "low beta" -- low volatility -- emerging stock market, even though the rand is volatile -- falling 12.5 percent last year -- because of its well-run financial institutions and exposure through the stock index to sectors such as gold.
"If you remove the volatility of the rand from the investment, it would probably be a high-rated market," said Oliver Bell, Middle East and Africa fund manager at T Rowe Price.
Despite the rally of the past year, valuations are not out of kilter with global emerging markets -- at a forward price/earnings ratio of 11, compared with 10 for global emerging markets, according to Lomax.
The rand is also stronger this year, gaining over 8 percent.
But there is little opportunity for more upside.
"The year we had last year, South Africa proved to be defensive and outperformed, now markets are running the other way, it's defensive and has lagged," said Jeff Chowdhry, global head of emerging equities at F&C.
Chowdhry said he was underweight South Africa last year, so had not benefited from the upside, but was remaining underweight.
One area where fund managers do see some attraction in South Africa is through its exposure to other African markets, such as Nigeria.
Many African exchanges are not liquid and do not have a strong representation of stocks such as retail, so investors prefer to look at South African companies with an African reach.
It is the same approach which drives investors to buy U.S. or European-listed stocks with emerging market exposure.
"Africa may be a small part of their revenue, turnover now, these companies are going to move fast," said Bell.
One example is retailer Shoprite, which said last week it saw scope for 700 stores in Nigeria.
But the hardier investor with African experience is likely to see yet more opportunities in local sectors, such as Nigerian-listed banks, after South Africa had such a strong year in 2011.
Malcolm Gray, who runs a pan-Africa fund at South African fund manager Investec with around 50-60 percent invested in South Africa, said valuations in Nigerian banks were looking cheap.
In South Africa, meanwhile, Gray said:
"We find it quite hard to find a lot of value at the moment." (Graphic by Scott Barber; editing by Ron Askew)