By Chijioke Ohuocha LAGOS (Reuters) - Nigeria's stock market recorded its strongest weekly gain for six months last week but analysts doubt it marks the beginning of a sustained rally, with volumes low and funds still largely waiting on the sidelines. Sub-Saharan Africa's second-biggest share index was one of the worst performers in the world in the first quarter of this year, falling close to 40 percent and significantly underperforming emerging markets peers. The index has risen more than 20 percent since the start of the second quarter but volumes remain low. Turnover on Monday was a quarter of the year-ago level. "This is not the beginning of a real rally. I think we will re-test the lows again before we see the real rally," said Zoran Milojevic, head of sub-Saharan Africa for Auerbach Grayson, a brokerage serving major U.S. institutional investors. When the Nigerian market was locked in a sharp decline from record highs in the middle of last year, regulators imposed a temporary one percent maximum downward limit on individual stocks which Milojevic said stopped it reaching its true low. "When the world was crashing, Nigeria implemented a one percent limit. It did not catch up with the bottom. The recent rally is a pure mirror of what's happening in other emerging markets in the world," he told Reuters. One Nigerian pension fund manager said frontier funds were largely waiting on the sidelines and testing the market. "Some of them had 20 million dollars in the market before the downturn, now they're coming back to test the market with as little as a million," he said. FLIGHT TO QUALITY With Africa's biggest hydrocarbon reserves and 140 million people, Nigeria is a huge potential market for everything from telecoms to banking and consumer goods. Investment strategists say it is just a matter of time before foreign funds return. Renaissance Capital said last month it had increased its Nigerian equity exposure to 30 percent from its more risk-averse stance in the first quarter, when it held 50 percent cash, 40 percent in fixed income and only 10 percent in equities. "Heading into the second quarter, we continue to expect the middle half of the year to mark a bottoming-out phase for Nigeria's equity market, underpinning a solid recovery in the second half," it said in a research note. Analysts say highly cash-generative blue chips with strong balance sheets -- including fast-moving consumer goods companies such as brewers, sugar, cement and flour producers -- are likely to benefit strongly from renewed investor interest. Banks, which account for around 60 percent of stock market capitalisation, are also seen recovering with some looking undervalued, although disclosure levels will be key to determining which are the strongest performers, analysts say. "We like pretty much all of the top-tier Nigerian banks, simply because they've been hammered," said John Mackie, Head of African Funds at Johannesburg-based Stanlib, which manages more than $2 billion in sub-Saharan Africa outside South Africa. "Whether the growth is going to be there going forward is open to debate, it's certainly not going to be the same sort of growth we've seen before, but when they're trading around 0.4 to book, how much cheaper do you want them to get?" | 
