Companies with international operations are set to take advantage of a global economic recovery in 2010, continuing the rally that began in 2009.

As the new decade begins, industrial and material companies could be set for the biggest yearly gains as the world’s emerging markets rapidly build infrastructure. Companies that sell consumer staples worldwide should also benefit from growth.

“Industrials will continue to perform, largely because of international operations,” said Michael Farr, CEO of Farr, Miller & Washington and manager of the Touchstone Capital Appreciation Fund. Growth in countries such as China and India will push demand higher for manufactured goods, he said.

Such demand helped markets in 2009. The Standard & Poor’s 500 index ended 2009 with a 23.5 per cent gain, its strongest performance since 2003. Each of the index’s 10 broad sectors logged increases with four of them – energy, materials, consumer discretionary and information technology – each up 50 per cent or more.

As for 2010, industrial stocks also should be helped as the US government continues spending at record levels on building projects to stimulate the economy, analysts say.

And as consumption overseas picks up, Standard & Poor’s equity strategist Alec Young said material companies will benefit from demand for raw goods. A weakening dollar and rising commodities prices, which helped fuel the stock market’s 2009 rally, should continue into the new year boosting prices even more, Young said.

However, Young warns that investors should not dive into the sectors betting material or industrial stocks will rise solely because the dollar is weakening. A weak dollar increases demand for exports and makes commodities more attractive to foreign investors, but companies still need to show sales growth.

“Consider currency as icing on the cake,” Young said.

Materials stocks, as measured by the S&P 500 index, showed a 52 per cent gain for 2009, while industrial stocks ended the year up about 24 per cent.

International growth is also expected to benefit companies like Colgate-Palmolive Co. and PepsiCo Inc. that make consumer staples companies, and sell them in emerging markets, Farr said. Consumer staples shares rose about 24 per cent in 2009.

While strength overseas may boost stocks, the prospects for growth in the US may depend on consumers opening their wallets. A recovery in consumer spending – the primary driver of the economy – will be necessary for the country to rebound from the worst downturn since the Great Depression. With the economy on the upswing, companies that sell discretionary goods and services, like restaurant and entertainment companies, are bound to see improved sales, analysts say.

Consumer spending traditionally picks up as recessions end and helps lead the economy out of a downturn.

“There’s pent up demand for spending,” said Thomas Villalta, co-portfolio manager of the Jones Villalta Opportunity Fund.

Prices of consumer discretionary stocks are based on such low sales expectations right now that even a modest pickup in 2010 should send shares higher, S&P’s Young said. But, he cautioned that sales might not be that great, but said he thinks they will improve. Consumer discretionary shares, as measured by the S&P 500 rose about 59 per cent for 2009.

Analysts expect businesses to ramp up spending as well, particularly on technology products as companies upgrade infrastructure after skimping on purchases of new computer hardware, software and other gear as the economy swooned. Information technology shares, as measured by the S&P 500, showed a 72 per cent gain in 2009.

Overall, analysts are widely predicting further growth in stocks in 2010. Young predicts the Standard & Poor’s 500 index will rise to about 1,215 by the end of the year – about an 8 per cent jump from the end of 2009.

Farr is more upbeat on growth for 2010, predicting the S&P 500 will end the year at around 1,250.