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Dollar Weakness to Benefit Emerging Markets

Investing in equities under current market conditions calls for a change in approach, according to Clive McDonnell, regional strategist at BNP Paribas Securities.

McDonnell cites China's consumer staples as an example. He says investors have done well holding these stocks as they have proven to be excellent relative performers in 2008, especially in the second-half of last year. However, it is time to look beyond defensive plays.

"As we move towards the recovery phase of the market cycle, a key part of our strategy is to switch away from those defensive staple names (and move) towards (the) consumer discretionary (space), specifically retail names within China," he says on CNBC Asia's "Protect Your Wealth".

McDonnell has raised South Korea to overweight, and he is re-rating some of the country's early cyclical stocks such as pulp and paper and capital goods names that have been among the worst performers during the bear market.

The reason is the U.S. dollar. He expects the greenback to weaken and fuel an improvement in liquidity as well as risk appetite that will benefit the region's fourth-largest economy.

"Quantitative easing was the key turning point for dollar. Going forward, the dollar is likely to weaken against most of the key emerging market currencies -- the Mexican peso, the Korean won. Also against euro, we see a weaker dollar against the euro not just this year but going into 2010, " McDonnell explains. "And this is a very important trend. Historically, when we see a weaker dollar, we see a pick up in flow of funds out of the U.S. and into international equities, and emerging markets being component of that."

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Catch "Protect Your Wealth" on CNBC's Asia Pacific network every Tuesday on "CNBC's Cash Flow," Wednesday on "Asia Squawk Box" and Thursday on "Capital Connection."