Industrial companies are set to become more profitable next year and should benefit from strong international exposure, a Wells Fargo analyst said Tuesday as she upgraded the sector.
Analyst Gina Martin Adams upgraded industrials to "Overweight" from "Underweight."
"While market-level results may be dull, sector and stock-level shifts are likely to be more exciting in 2010," she said in a client note.
Adams said the primary risk to markets next year is the impact of federal economic policy on the dollar and interest rates.
"We anticipate a modest dollar strengthening, which may derail stocks at first but should not be strong enough to completely crush equity performance," Adams said.
Policy in the next few years is more likely to be a drag on the economy as "monetary accommodation is slowly removed" and politicians face "grumbling constituents to create a job-full recovery without spending more of their tax dollars," she said.
Propping up the economy with tax credits has so far helped stabilize the consumer sector and will not be scaled back easily in 2010, an election year, Adams said.
"We expect technology, industrials and materials sectors to get the largest net benefit from the lagged impact of 2009 legislation, as infrastructure starts to pick up," she said.
For 2010 and 2011, Adams said international economic growth appears to be stronger and U.S. consumption will be weak. In addition, a push is likely for greater productivity and efficiency, resulting in a recovery in corporate capital spending, Adams said.