Zuma, a survivor of scandals that would have buried most politicians, is favourite to win party elections this month, largely because of grassroots support from trade unions and members of South Africa's poor black underclass.

A win would put him on course to become president of Africa's biggest economy in 2009.

But investors are not thrilled.

His trade union and left-wing links make him suspect in many investors' eyes. They fear he will be pressured to up spending on social programmes and relax the fiscal discipline of the last decade.

Some hope Zuma's track record of centrist voting and his attempts to reassure investors -- most notably, during a recent private visit to the United States -- are signs he may turn out more like Brazilian President Luiz Inacio Lula da Silva, who came to power on a leftist platform then proceeded with reforms that have made Brazil an emerging markets darling.

"It is definitely a risk, the news that Zuma may be the next president. He is not a market-friendly candidate, his reputation is worse than Lula's ever was," said Maarten-Jan Bakkum, portfolio strategist at ABN AMRO Asset Management, which runs almost $2 billion in emerging markets investments.

"But on the plus side, institutions are very strong in South Africa, there is a solid policy direction and we don't see that one man can completely change that," he added.

Bakkum has put his money where his mouth is -- he has gone long South African stocks, noting valuations 12 times forward price-to-earnings versus about 14 for emerging markets overall.

"South African companies are among the best-managed in emerging markets. The government has done a good job and we want to see a continuation of the policies of past years," he said.

CHAVEZ?

There is of course the chance of another Hugo Chavez, seen by many as wasting Venezuela's oil bonanza on nationalising swathes of the economy and on lavish social spending.

Ratings agency Moody's, however, is not too worried.

"Zuma has never taken a different position on economic policy than that which was generally agreed by consensus among policy makers," said Moody's Vice President Kristin Lindow.

"Investors at this stage are not particularly alarmed as Zuma has been doing his best to reassure them."

Since the dismantling of apartheid in 1994, South Africa has been held up as a beacon of multi-racial democracy. Poverty, unemployment and disease are rife but there is also a growing middle class, driving economic growth of 5 percent a year.

Investors have been pumping cash into South African bonds and stocks with flows year-to-date at over $13 billion. The stock market is just off record highs hit earlier this year.

But now, uncertainty over future policy is coinciding with double-digit interest rates and a slowing economy. Data from fund consultancy EPFR Global shows funds have steadily reduced weighting to South Africa since January 2006.

"We are extremely underweight South Africa. Stocks there are relatively cheap and from a bottom-up point of view, they look interesting. But you have not seen the full impact of the rate rises and you have the politics on top," said Oliver Bell, senior investment manager at Swiss fund Pictet.

The South African Treasury's conservative fiscal stance, beloved of rating agencies, has drawn fire from local left wingers and trade unions. Zuma may have no choice but to oblige with more social spending and some fear, even nationalisations.

"From an investor point of view Zuma is a complete unknown. The biggest worry is what favours he is having to pull in from the trade unions to get elected," Bell said. "He may say he will not change policy but I'm quite happy to be underweight the market and wait and see as it all unfolds."

SPENDING NEEDED?

But many argue South Africa can tolerate some fiscal loosening. This may even be desirable, especially if spending is directed to education and infrastructure -- the main constraints the economy is bumping against as it tries to ramp up growth.

Unemployment is over 25 percent, blamed mainly on a skills shortage while more healthcare spending may help tackle an AIDS epidemic -- factors that are inhibiting direct foreign investment. But there is not much public debt.

"Zuma has talked of loosening fiscal policy and spending more on schools and hospitals. Markets would be hard-pressed to say that's not essential," said Kieran Curtis, fund manager at Morley Asset Management with $1 billion in emerging markets.

"They have worked hard with counter-cyclical monetary and fiscal policy so they should be able to loosen both if growth slows. And if Zuma wants to spend more there is plenty of room.

"The Lula scenario is what people are hoping for," he said.