The government's sudden move to cut the fuel subsidy, by raising pump prices by 41%, rocked the market last week.
Investors turned cautious following the fuel price hike amid concerns that consumer spending will be crimped by rising inflationary pressures.
The Kuala Lumpur Composite Index (KLCI) slid to a two-month low of 1,223.56 points on Thursday, after the increase in the price of petrol was announced the day before.
The auto, plantations, power generation and consumer sectors were hit hard by the selling wave.
Auto stocks fell out of favour due to fears that car sales would slow down as a result of higher petrol prices.
Investors also unloaded shares in independent power producers, such as YTL Power International Bhd and Tanjong plc, and plantation companies after the government imposed windfall tax on them.
The market, however, regained some lost ground last Friday aided by an overnight gain on Wall Street. Bargain hunters snapped up oversold counters, pushing the benchmark index to a higher close of 1,248.57 points.
The sharp gain in Tenaga Nasional Bhd lent support to the KLCI. The utility group's share price jumped after it was permitted to raise its tariffs in July. The stock surged RM1.70 to RM9 on Friday.
Other prime movers included plantation firms Sime Darby Bhd, whose shares added 20 sen to RM9.05, and IOI Corp Bhd which climbed 10 sen to RM7.20. Public Bank Bhd climbed 20 sen to finish at RM11.10.
Week on week, the KLCI declined 2.2% or 27.53 points from the previous Friday's close of 1,276 points.
The government's move to cut subsidies prompted many research houses to trim their corporate earnings forecasts and year-end targets for the KLCI.
The move, although deemed necessary to safeguard the local economy in the long term, is expected to result in higher inflation. This could result in a possible interest rate hike by Bank Negara Malaysia.
"The only sectors still worth putting your eggs into are oil and gas and plantations, with earnings visibility for most players still fairly clear. Every other sector has either one issue or another, thereby, making an outright 'overweight' call a difficult one," says ECM Libra.
Nonetheless, some analysts welcome the measure. Citi Investment Research says it has turned even more bullish on the Malaysian market.
"Malaysia's risk premiums had gone up following the general election on concerns that the government would no longer be able to make decisions.
"The recent series of policy changes have proved otherwise," the research house says.
It notes that under the watchful eye of the stronger opposition, the government is moving faster and making the "right decisions".
HLG Securities has also changed its call on the market to "mildly positive".
The brokerage firm expects the market to recover from current levels. "We recommend partial entries (30% of portfolio) for traders and investors as political and regional inflationary risks still exist," it says