The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) may breach the 1,700 points level by year-end as risk aversion normalises, says UBS Securities Malaysia Sdn Bhd.
Head of research/strategist Chris Oh said the expectation was also based on shares earnings growth of nine per cent for this year and 13 per cent for 2013.
"However, in the event the euro zone crisis deepens, the key barometer could slip back to 1,300 points level.
"The Euro zone crisis is expected to dominate Asian equity direction this year.
In the near-term, Oh believed an election rally would likely spur buying sentiment on the local bourse.
"The market believes spending by the government will take place ahead of the general election and will filter through the Budget 2012 incentives.
"I think broadly speaking the anticipation of the upcoming election will spur a rally and prices will move up the next couple of months," he added.
However, Oh said as Malaysia headed towards the 13th general election, investors may turn cautious as the outcome of the elections was difficult to predict.
"The result is important to determine market direction, the last six election results were mixed, so it's (outcome of next general election is) difficult to predict," he added.
Nevertheless, Oh expected Prime Minister Datuk Seri Najib Tun Razak to call for a general election as soon as sentiment improved on the back of either a clearer resolution to the sovereign debt crisis or a pick-up in economic data.
"This could result in a relief rally where cyclical sectors will benefit such as banks, property, construction and, oil and gas," he added.
Despite a bullish outlook for the KLCI, UBS, however, expects a Gross Domestic Product growth of around three per cent this year for Malaysia.
"We expect the Malaysian economy to slow down in response to weaker global demand and challenging global financial markets," he said. -- Bernama