* Currency fall boosts shares with offshore revenue
* Prospects of higher rates drags bonds lower
By Stella Mapenzauswa
JOHANNESBURG, Sept 4 (Reuters) - South African equities have marched ahead this year despite sluggish economic growth, with local investors scaling back their bond exposure in favour of shares that offer a hedge against a sharply weaker currency.
Central bank regulations limiting local investors to taking only 25 percent of their assets offshore have prevented a mad rush out of South Africa that might have ensued with the rand's nearly 20 percent fall against the dollar this year.
But asset managers are now juggling their money around more actively than they have done in the past to maximise returns, and the local bourse has benefited the most.
"It's been a good news story for the equity market and a bad news story for the bonds," said Mike Keenan, a strategist at Barclays Africa.
"It is a way of protecting your investment against rand depreciation, and that has actually seen the JSE (Johannesburg Stock Exchange) doing very well in an environment were growth is still weak and the central bank is hiking rates.
The rush to equities has boosted the likes of Naspers , Sasol, Richemont, which have a big weighting on the share index and generate most of their revenue from abroad, meaning a weaker rand works in their favour.
The South African Reserve Bank hiked interest rates for the first time in a year in July, anxious to protect the value of the currency rand in the face of an emerging market sell-off spurred by expectations that U.S. interest rates will soon starting rising.
Investors and analysts alike are pricing in more domestic hikes before year-end, and this has prompted a bond sell-off that has pushed the yield on the 2026 benchmark up more than 140 basis points since December.
Even foreign investors have gone off on bonds, with inflows slowing to just over 11 billion rand ($800 million) so far this year from over 14 billion rand over the same period in 2014.
In contrast, offshore accounts have bought nearly 35 billion rand worth of equities, up significantly from 27 billion rand last year.
"Over the medium to longer term, our preferred asset class is equity," said Rhynhardt Roodt a fund manager at Investec Asset Management.
Appetite had also risen for so-called multi-asset flexible funds which allow investors to comply with regulations limiting equity exposure to below 75 percent, Roodt told Reuters.
"South African investors want to be protected against rand weakness and the low growth domestic environment, inflationary pressures, so you see things like flexible funds coming to the fore."
$1 = 13.7167 rand Editing by James Macharia