Morgan Stanley initiated Malaysia's stock market at overweight, despite noting the MSCI Malaysia has gained more than 6 percent so far this year, as it pointed to five tailwinds.
Firstly, the government led by Prime Minister Najib Razak may call an election as early as September or October, Morgan Stanley said in a note dated Thursday U.S. time.
Malaysia tends to ramp up fiscal spending before elections, improving consumer and business sentiment, the bank said. Morgan Stanley pointed to two months before the dissolution of parliament as the "sweet spot" entry point for the best returns.
The ruling coalition, which has held power since the late 1950s, was broadly expected to keep its grip on power, despite a long-running scandal over allegedly embezzled funds from Malaysian state investment fund 1MDB.
Morgan Stanley noted that over the last two elections, the ruling party had dropped below 67 percent of the seats in parliament and 50 percent of the popular vote, but that the opposition remained divided.
The second driver of Malaysia equities is increased infrastructure spending, with the government's push for more private investments being driven by funding from China, the bank said.
"China is increasingly making investments in Malaysia as part of its 'One Belt, One Road' projects," the note said, adding China and Hong Kong made up around 40 percent of Malaysia's foreign direct investment in 2016.
Additionally, Chinese e-commerce giant Alibaba recently said it would open a 7 billion ringgit ($1.59 billion) regional hub in Kuala Lumpur, the bank noted.
The commodity recovery was also set to drive Malaysian shares higher, the bank said, pointing to a strong correlation between the two.
It noted that Malaysia's Composite Commodity Index, including oil, palm oil and rubber, has surged 41 percent from its 2015 trough, with oil and palm oil both expected to recover further.
Malaysian company earnings were also poised for recovery, Morgan Stanley said, estimating profit growth would improve to 8-9 percent in 2017-18 after three years of declines.
The bank also pointed to construction companies' "peak" order book levels, a 10 percent rise in palm-oil volumes with chances for price increases and a drop in banks' provisions as non-performing loans peak.
The fifth driver for Malaysia stocks was a "cheap and supported" currency, the bank said.
"We think domestic sentiment on the ringgit has stabilised, with lower political uncertainty and improving commodity prices," it said. "The conversion of export proceeds into ringgit is also supportive."
Earlier this year, the ringgit had weakened to around levels not seen since the Asian Financial Crisis in 1997, with the dollar fetching as much as 4.4980 ringgit.
In Friday trade, the dollar was fetching around 4.39 ringgit.
To be sure, the bank noted that the MSCI Malaysia may be expensive compared with its Southeast Asian peers, trading at 16.3 times the next 12-months' earnings.
But it added that it believed earnings were depressed, with the index trading at only 14.9 times its 2018 earnings per share forecast.
The bank also noted that Malaysia was the only Southeast Asian market where foreign investors were underweight compared with other emerging markets.
"Given the low positioning, upcoming catalysts, and turnaround we have seen in commodity-oriented currencies like the Brazilian real (BRL) and Russian ruble (RBL), Malaysia could see an influx of foreign equity flows, which could help re-rate the market further along with improving earnings trajectory," it said.
It set a base case MSCI Malaysia target at 645, compared with levels around 605 currently.
Not all analysts were taking a positive view on Malaysia's market. Nomura said in a note on Friday that it was staying underweight.
Nomura said the primary argument for increased interest in Malaysia stocks was that after underperforming regional peers "so significantly" for four years, the market should be attractively valued. The bank also noted that politics and governance appeared to be improving and that an early election could bring further inflows to the market.
But Nomura wasn't convinced.
"The market is not cheap," it said, adding that stocks there could be the most expensive in the region.
Nomura also said that while earnings had bottomed, they continued to underperform the region and would continue to do so in 2017 and 2018.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1