Is it time to get back into Malaysia’s market?

Sha Ying | CNBC

Any benefits to Malaysia's markets from the sale of assets by the country's troubled economic development fund may be limited to the currency, with analysts remaining downbeat on stocks.

Assets in Malaysia have been battered by the political scandal over the deeply indebted 1Malaysia Development Berhad (1MDB).

Launched in 2008, 1MDB, one of Prime Minister Razak Najib's pet projects, has been in the limelight for months amid allegations of financial fraud. The fund is currently undergoing a "rationalization" program, launched in May, to reduce its debt of more than $11 billion by selling assets.

This week, 1MDB sold its power plants for 9.83 billion ringgit ($2.3 billion) to a Chinese nuclear power supplier. It's reported to have paid around 12 billion ringgit for the assets.

But analysts were generally positive on the deal, seeing it as a sign that the scandal might begin to wind down.

"1MDB is at the center of a political scandal that, with falling oil prices, has weighed on Malaysian financial asset prices," Tim Condon, head of research for Asia at ING Financial, said in a note Tuesday. "We expect investors will see the (power asset sale) news as a hopeful sign of light at the end of the 1MDB scandal tunnel and will ignore the loss to the Treasury."

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But analysts aren't necessarily looking at stocks in the wake of the news.

Credit Suisse expects the currency may be the big gainer, with the asset sale positive both for potential inflows and lower perceived political risks.

"The receipt of 9.8 billion ringgit is quite sizeable for capital account flows, at around a third of net financial outflows in the third quarter of this year," Credit Suisse said in a note Wednesday. "This will likely provide some support to the currency if the funds come after February."

The bank now expects the dollar will fetch 4.20 ringgit in three months and 4.40 ringgit in 12 months, down from its previous forecasts of 4.50 and 4.60 ringgit respectively. At midday Thursday, the dollar was fetching 4.210 ringgit.

Due to the double whammy of the 1MDB scandal and sharp drops in the prices of the country's commodity exports, the ringgit has weakened to levels last seen during the 1998 Asian Financial Crisis; it lost as much as 28 percent of its value against the U.S. dollar from the beginning of the year through the end of September, although it's recovered more than 5 percent since then.

ING, however, expects the asset sale will be more positive for credit default swaps (CDS) on the country's sovereign debt. Condon noted that the five-year Malaysian CDS narrowed to 175 basis points Tuesday from 211 basis points at the time of the October 23 budget speech. He expects it may head toward around 125 basis points. A narrower spread indicates the debt is considered less risky.

Signage for 1Malaysia Development Bhd. (1MDB) is displayed at the site of the Tun Razak Exchange (TRX) project in Kuala Lumpur, Malaysia.
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But analysts aren't exactly going overboard in optimism on Malaysian assets.

Deutsche Bank, after talking with investors around Asia, said it was seeing an increased willingness to consider buying stocks there, compared with three to six months ago, in part driven by expectations the ringgit will stabilize.

But the bank noted investors are only looking at going from underweight stocks to a neutral weighting. For one thing, "valuations for many big cap stocks do not look cheap," it said in a note Tuesday.

The stock market benchmark KLCI is down around 4.4 percent year-to-date, after climbing around 1.4 percent so far this week.

Credit Suisse is also still pretty cautious on the country's stocks.

"We believe that the Malaysian market is not attractively priced yet. We remain bearish," it said, noting that the MSCI Malaysia index's price-to-book ratio is at a 29 percent premium to the MSCI Non-Japan Asia index, above the long-term average of 25 percent.

Credit Suisse sees another concern: the 1MDB asset sale hasn't much changed anything else.

"Although the deal is supportive of the ringgit in the short term, there is the risk that capital flight will continue as consumer sentiment remains very weak," it said.

The country's consumers are not happy campers: Market researcher Nielsen found that consumer confidence in Malaysia fell to 78 points over the July-September period, down 11 percentage points on the quarter, marking a record low since the survey began in 2005, as well as Southeast Asia's worst reading for the quarter.

In addition, Credit Suisse said it expected gross domestic product (GDP) growth to "grind lower" toward 4.4 percent in 2016, lower than the consensus expectations for 4.6 percent.

-Neelabh Chaturvedi contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1